Discussion:Gain on Repayment of Shareholder Loan
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Discussion Forum Index --> Advanced Tax Questions --> Gain on Repayment of Shareholder Loan
Discussion Forum Index --> Tax Questions --> Gain on Repayment of Shareholder Loan
| 27 March 2009 | |
| I have researched this topic extensively, and I have read many of the discussions requiring a shareholder to report a gain from the repayment of a loan whose basis was previously reduced. I am a bit confused about the timing of when the current year losses are deducted from the loan basis for the purpose of computing the gain.
Example, client has loaned his S-Corp $40,000, evidenced by a written note. Last year the loss from the S-Corp reduced his loan basis to $39,000. (Client has no remaining stock basis.) During 2008, the S-Corp re-paid $5,000 of the loans to the client. The S-Corp also reported a loss of $5,000 for 2008. My question is, does the current year loss reduce the loan basis for 2008 for the purpose of calculating the gain? I am using PPC's 1120S Deskbook, and the examples given refer to a reduced basis in year X, with a repayment being made in the following year. If I follow that example, the current year loss would not reduce the loan basis for purposes of calculating the gain until applied to a loan repayment made in 2009. My logic tells me that the current year losses would reduce the loan basis for the purpose of the gain caluculation in 2008, but because the computed gain would be higher using this calclulation, I want to be sure that I am understanding this correctly. Thank you for your input. | |
| 28 March 2009 | |
| The portion that would be taxed is beginning loan basis (39,000) / beginning loan balance (40,000) - 1 = 2.5% x 5,000 in loan payment = 125 LT capital gain. 2009 loss allowed due loan basis, doesn't affect the current capital gain portion on the payments, since the payments were made before the 09 loss was taken into account. | |
| 28 March 2009 | |
| Doesn't Example 20B-9 reflects your situation? Looks like you would calculate your gain first on the $5,000 repayment, then apply the loss to the remaining basis in the debt that is still outstanding. | |
| 28 March 2009 | |
| Thanks for your replies. Example 20B-9 does reflect this situation, and not including the loss for calculating the gain makes sense since the payment was made before the loss is taken into account. I appreciate the feedback. It helps to get another professional opinion! | |
