Welcome Guest! You aren't signed in. Sign In

My Q&A All Q&A
Go

BARBOLEARY

TaxAlmanac

0 watching

SHAREHOLDER LOANS TO S CORP

See original discussion at http://www.taxalmanac.org/index.php/Discussion:SHAREHOLDER_LOANS_TO_S_CORP


I have a new S Corp client. He told me that he is planning on making period loans to the company on an as-needed basis. He will receive annual interest based on the balance and get repaid as the company sees fit (meaning $500 here or $400 there, when it can afford it). Can he do this?

I was under the impression that a personal loan to a S Corp should be for a specified amount of money. Can he make intermittent loans as he said? Is this legal? How would you handle this?

( Asked 03/12/07 11:02 PM in TaxAlmanacViews by community 37 )

Answers (23)  Comments (2)  

JR1

TaxAlmanac

Sure, no problem. At year end, document the loan balance, issue a 1099INT for the interest paid to him. No worries.

( Answered 03/12/07 11:13 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Yup -- sounds about right to me JR1 (of course that is the way I do it as well...)

( Commented 03/13/07 01:59 AM in TaxAlmanac ,Views by community 37)

Klesher

TaxAlmanac

Barb-this is fine. I have an 1120S client that takes draws all year, he pays the same 941 amount each month, we file payroll taxes every quarter , then at the end of the year, I get his books and find he took more draws then he should have. We take it against his loan and issue him 1099 int.

( Answered 03/13/07 02:06 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

MsTwizz

TaxAlmanac

Is it better to have a shareholder loan? I booked my investment into my S corp as a capital contribution. It seems that it may be better to have the investment booked as a loan to the corp, with the corp paying me interest.

( Answered 03/13/07 04:42 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Gmacdon167

TaxAlmanac

Interest is not paid on "capital contributions" as they are just that, "capital contributions." Repayments are a return of capital and reduce stock basis, while contributions increase stock basis. Loans are loans, increasing basis only to the extent that they are needed to take losses. At that point, repayments are capital gain items as a percentage of stock basis vs loan basis.

Clear as mud, I know, but I had a few of those beverages you were talking about earlier.

( Answered 03/13/07 04:49 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

MsTwizz

TaxAlmanac

I just ask because some of my s-corp clients have a shareholder loan and some use the capital contributions. I'm still new at this and learning......more wine please?

( Answered 03/13/07 05:10 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Taxstudent07

TaxAlmanac

Good question - is it fairly common in practice to use loans for cash contributions after the initial formation of the corp? I'm aware that "distributions" must be based on ownership % and that return of capital (APIC) is based on the ordering rules, but the loans seem like a convenient method for returning cash to one SH without having to worry about maintaining ownership % of the group like in an actual distribution.

( Answered 06/27/07 09:09 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Kevinh5

TaxAlmanac

It is quite common, especially for family owned businesses. Consider tax prep - lots of income Feb through April, but not much Nov and Dec. Quite common to have to "feed the alligator" with cash right before tax season to train employees, buy supplies and software, etc.

( Answered 06/27/07 09:11 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Taxstudent07

TaxAlmanac

Kevinh5,

Thanks - if an S-corp had three SHs, 70-20-10, and each pumped their % of 100k into the corp, would you classify this as SH loans or capital contribution? If the intention isn't to pull the $$ back out soon, would it be more "appropriate" to classify it as APIC? I guess what I'm seeing is that loans are preferable over capital contribs most of the time, especially if the corp will have the ability to pay interest on the balances at YE.

( Answered 06/27/07 09:20 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JR1

TaxAlmanac

The interest offsets on the 1040, so that doesn't matter, but yes, like you suggest, I prefer loans after the initial capitalization, primarily for the purpose of not worrying about disproportionate distributions. Ever. You distribute the profits once at the end of each year, to the notes. Whatever gets paid off the notes can never affect the S status.

( Answered 06/27/07 10:53 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Taxstudent07

TaxAlmanac

JR1 - your response makes sense. Also, please forgive me, but I'm not quite sure I follow when you mention distributing the profits to the notes - sorry for the ignorance.

Taxstudent07

( Answered 06/27/07 11:39 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JR1

TaxAlmanac

Merely a journal entry after year end. Suppose profit is 20k, and would normally be transferred from current earnings to AAA. Instead, transfer it to a Note Payable-Shareholder, effectively distributing it already. Now the corp owes the S/H the money in the form of debt rather than undistributed profits.

( Answered 06/28/07 03:35 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Taxstudent07

TaxAlmanac

Thanks, JR1.

( Answered 06/28/07 02:09 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

LJACPA

TaxAlmanac

JR, you have mentioned this before and I asked what you meant, but did not understand it until this response. I too tend to use SH loan vs cap contrib after the initial capitalization, if for no other reason except additional money out of corp to SH. I think one other thing to keep in mind, however, when you have more than one shareholder and one SH loans to the corp and the other(s) does not, then the interest does not offset. That is, 50/50 SHs, one loans to the corp and gets interest (100% to income on personal return), but only 50% deduction through K-1. Better to go to capital?

( Answered 06/28/07 02:55 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JR1

TaxAlmanac

Good point, Lynn. I guess I've never thought about that, but I do have s/h's where the notes are significantly different over time for one reason or another. One will get the benefit of a deduction and the other will pick up more income. Hmmm. Is there some rule we should know about to address that? I would never, let me be more clear, will never keep it in AAA for multishareholders. The fact is that distributions will be disproportionate at some point, and you've blown the S status. Unless you control the amounts that distribute into notes, keep the notes smaller, etc. But somewhere, somebody's going to screw it up and now you've got really big problems. I'd rather they be unhappy about the interest differential than deal with a non-S status...

( Answered 06/28/07 03:16 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JohnWalden

TaxAlmanac

Hi JR1,

I've been reading quite a few discussions about S-corp distributions, and I read a lot of your comments about distributing the profits at year-end to "Notes Payable to Shareholder" instead of having undistributed profits. I understand that I would want to do this so that the distributions don't appear unequal someday. Could you please explain the entries for this? Does this money get recorded as a distribution and put on line 7 of the M-2 and also show up on the K-1s? Does the S-corp have to pay interest on these notes?

If the corporation didn't do this, would all future distributions have to be based on the percent of ownership on the day of the distribution (and thus not take into account past profits that were allocated to shareholders on their K-1s and not distributed)? I'm curious how not doing the N/P method would affect an S-corp where there's been a change in ownership percentages and they want to do a distribution. It seems like the distribution would have to be based on that day's ownership percentage and wouldn't take into account past undistributed profits.

If anyone else wants to jump in to explain this, too, I'd appreciate it. Thanks!

( Answered 02/12/08 06:05 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 
  • JR1
  • TaxAlmanac
  • commented

Answered in PM.

( Commented 02/12/08 03:37 PM in TaxAlmanac ,Views by community 37)

Flatlands

TaxAlmanac

Hi - In looking at these interest discussions I have 2 questions. First, in another discussion JR1 discussed self charged interest. The Corp issues a K-1 with the interest expense and the SH reports interest income on Schedule B to offset. I think I missed something. This appears to be a wash with no true tax deduction. If the SH has actually paid this interest to a financial institution can they also deduct it as investment interest expense on schedule A for the deduction. Second, how would I report this. I have a client that formed an S Corp in 2007. He personally borrowed money and loaned it to the S Corp to buy a campground (hasn't be operational in 20 years). Other than incurring a few utility bills nothing was done with the business. How should this interest be reported for 2007? Thanks

( Answered 02/23/08 09:27 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JR1

TaxAlmanac

When the Corp borrows money from a bank or outside party, of course, there's a deduction. As I recall, if the SH borrowed it, it's not investment interest since he's involved in the company. Regular biz interest...Sch. E? But when the SH loans it to the corp, and rules say that interest must be paid, it's an expense to the corp, but income to him. Yes, it zeroes. That's ok. It's also money he can get out of the corp free of payroll tax and comp issues...

( Answered 02/24/08 12:26 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Cotopop

TaxAlmanac

Realize this is an old post but the last response comes closest to my situation.I have a new S corp client who is a single shareholder and has loaned the S -Corp money over several years to the tune of around $350,000 in principal . The S-corp is on a CASH BASIS. He has the loans documented with appropriate interest rate. The S Corp has made no interest payments for several years but has been accruing and reporting it on the balance sheet for their internal purposes. They indicate when the business turns around and they have the ability to repay the accrued interest they will. There has been no tax deduction for the interest on the S-Corp tax return (Cash basis taxpayer ) and no phantom interest reporded on the personal return. Does this seem correct or should I start issuing a 1099 INT and report the interest on the personal return? Thanks for your help

( Answered 06/06/10 11:06 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

JR1

TaxAlmanac

You're fine. As long as both returns report the same thing, you're ok.

( Answered 06/07/10 02:07 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

LH2004

TaxAlmanac

Income and deduction will typically match, but they might not, and if they don't, it can't be in your favor. I would prefer to treat the unpaid interest as a contribution to capital.

( Answered 06/07/10 04:24 AM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Dwacpa

TaxAlmanac

I have some problems with the indiscriminate use of the shareholder's loans accounts, especially when tax avoidance is the motivation. IRS is claiming to target S corps and, in particular, S corp loans. They are looking for entries in corporate minutes authorizing loans, actual promissory notes evidencing these loans, business purpose, etc. IRS can reclassify these loans as capital or distribution which could possible result in involuntary termination of election. Another common example is when distributions are in excess of the AAA account, the preparer simply reclassifies the distribution as loan to s/h, rather than risk capital gains to the s/h. This constitutes a preparer making an unauthorized management decision which according to an ethics course I recently took, subjects the preparer to major liability and is a big no-no.

( Answered 06/07/10 05:29 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Jeffreymcclellan

TaxAlmanac

I have a similar issue. I have a client who is a 50% S-Corp shareholder (her husband is the other 50%). She used personal credit cards to advance cash to the S-Corp as well as charging business expenses. She has other personal items on these cards as well. I think there have been inconsistencies with the credit card payments. The company appears to pay some and she has paid from her personal bank account too. I am currently going through the books to map all of these out but am torn on how to treat these and why. She would like to see these as all capital contributions and not a loan. Anyone have thoughts as to why I would choose capital and not loan?

( Answered 11/03/10 01:08 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

CathysTaxes

TaxAlmanac

Jeffrey, since your client is a S-Corp, she needs to document these types of transactions and how the S-Corp is to treat them.

She can make these additional paid in capital, loans from shareholder, or set up shareholder's expenses.

If she chooses the APIC, then it is my understanding that this money stays in the scorp and she can't take a distribution from this account. If she makes it a loan from shareholder, then when the scorp is out of its cash crunch, she can repay the loan plus interest to herself. If she sets it up as shareholder expenses, after she debits the expense account she can credit a notes payable to herself.

( Answered 11/03/10 02:44 PM in TaxAlmanac ,Views by community 37 )

Rating (0):
This helped! Not too helpful.
 

Know the answer?

Submit An Answer

Just want to comment?

Add A Comment

Have a new question?

Ask The Community