Discussion:SHAREHOLDER LOANS TO S CORP
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BARBOLEARY (talk|edits) said: | 12 March 2007 |
| 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? | |
| March 12, 2007 | |
| Sure, no problem. At year end, document the loan balance, issue a 1099INT for the interest paid to him. No worries. | |
| 13 March 2007 | |
| Yup -- sounds about right to me JR1 (of course that is the way I do it as well...) | |
| 13 March 2007 | |
| 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. | |
| 13 March 2007 | |
| 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. | |
Gmacdon167 (talk|edits) said: | 13 March 2007 |
| 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. | |
| 13 March 2007 | |
| 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? | |
Taxstudent07 (talk|edits) said: | 27 June 2007 |
| 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. | |
| 27 June 2007 | |
| 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. | |
Taxstudent07 (talk|edits) said: | 27 June 2007 |
| 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. | |
| June 27, 2007 | |
| 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. | |
Taxstudent07 (talk|edits) said: | 27 June 2007 |
| 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 | |
| June 28, 2007 | |
| 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. | |
Taxstudent07 (talk|edits) said: | 28 June 2007 |
| Thanks, JR1. | |
| 28 June 2007 | |
| 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? | |
| June 28, 2007 | |
| 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... | |
JohnWalden (talk|edits) said: | 12 February 2008 |
| 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 anyone else wants to jump in to explain this, too, I'd appreciate it. Thanks! | |
| 23 February 2008 | |
| 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 | |
| February 24, 2008 | |
| 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... | |
