Discussion:S Corp Loan - Imputed Interest
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Discussion Forum Index --> Basic Tax Questions --> S Corp Loan - Imputed Interest
Discussion Forum Index --> Tax Questions --> S Corp Loan - Imputed Interest
| 23 March 2009 | |
| My client has made distributions in excess of basis of his S Corp interest (LLC). So, to avoid capital gain treatment on the distribution, I'm suggesting he reclassify distributions as shareholder loan. Loan is $36,000 at year end.
There was an earlier thread from 2006 that referenced Rev. Ruling 97-57 and concluded that no imputed interest was required on an S Corp shareholder loan because there was no net tax effect to the shareholder (interest income to the shareholder, lower S Corp earnings passed through). I disagree. And I read Rev. Ruling 97-57 and I really disagree. I think shareholder needs to impute interest at AFR. Right? | |
| 23 March 2009 | |
| I've always imputed interest on shareholder loans. It's not always a wash. Say a 1% shareholder loans $1,000,000 to the corp. The deduction for the expense will go to somebody else as a passthrough but I'm pretty sure the IRS is going to want tax from the lender anyway. | |
Harry Boscoe (talk|edits) said: | 23 March 2009 |
| I'm pretty sure that the rules will require that interest be imputed in this situation. Most of all because the shareholder's interest expense will likely be *nondeductible* and that's what the rules seem to be looking for. My cynicism is peeking out... | |
| 23 March 2009 | |
| He's a sole member LLC (S Corp). Could actually be beneficial to the shareholder if he has investment interest so I figured the IRS couldn't possibly have ruled it a wash not worth calculating.
I guess the real question is if he imputes interest, that decreases his S Corp income and so his loan is larger; larger interest calculation means lower S Corp earnings which means .... make it stop, make it stop! | |
Harry Boscoe (talk|edits) said: | 23 March 2009 |
| PBR makes it stop. But then it starts up again... | |
| 24 March 2009 | |
| I thought a single-member LLC is a "disregarded entity" and therefore reported on sch C or E, depending on the income type. So why would you impute interest? | |
| 24 March 2009 | |
| Dnc -
A SMLLC has no inherent tax status. It is treated either as a sole proprietorship (disregarded entity) or as a corporation (C or S) depending on what the owner elects to do. | |
| 24 March 2009 | |
| That's true for LLCs in general. A MMLLC is either treated as a partnership or a corporation. | |
| 24 March 2009 | |
| Beach -
The loan is an asset on the corp's books, so the interest will be paid by the owner to the corp. It's interest income to the corp. The loan is for the initial amount; the interest is income in the following year. You won't get caught in a recursive function. That does happen when a tax is based on post-tax income (like the Philadelphia BPT when using Method I). | |
| 24 March 2009 | |
| I understand that, but I do not understand why you would impute interest on a single member LLC which should be filed on sch c or e? I understand that you have to have more than 1 member to be a partnership and you can elect for, tax purposes, its tax treatment-partnership or s-corp. | |
| 24 March 2009 | |
| Correct but incomplete. The default for single-member LLCs is disregarded entity, and the default for multi-member LLCs is partnership. But any LLC, even a single-member LLC, can elect to be taxed as a corporation. | |
| 24 March 2009 | |
| Okay.Overlooked the elect status. You can elect to be a s-corp by filing an form 8832, if that isn't filed, the IRS treats the entity as a sole-proprietorship. Correct? Sorry for the confusion. | |
| 24 March 2009 | |
| Correct. Presumably the OP did elect S corp treatment, but in the absence of such an election, the SMLLC is by default treated as a disregarded entity. | |
Harry Boscoe (talk|edits) said: | 24 March 2009 |
| When the smoke clears from the LLC lesson, here's a deeper hole for the S corporation shareholder to fall into...
IIRC, the imputed interest on this type of loan is considered paid and repaid [distributed] as of December 31 each year. In this particular situation, it's gonna be [deemed/imputed] interest income to the S corp and then that amount is deemed paid out to the shareholder. The shareholder will be deemed to have paid interest to the corporation, and then will treated as receiving the deemed corporation distribution. The tax consequences are myriad, because we don't know the shareholder's use of the "excess" payout that became the "due from" for tracing purposes. But I suspect that the shareholder's basis in his stock is zero which means that the interest income of the S corporation will be [or maybe it won't be] income to the shareholder which will give him [or maybe won't give him] enough basis to receive the deemed distribution tax-free [or maybe not]. **Now** can I have a PBR. Or two? | |
Harry Boscoe (talk|edits) said: | 24 March 2009 |
Imputed interest between a shareholder and an S corporation is an octuple-entry accounting phenomenon. When the interest is deemed paid, there's a double entry on the corporation's books, and a double entry on the shareholder's "books" and then when the amount of the interest that was deemed paid is restored/repaid/distributed, there's yet another double entry on the corporation's books and a double entry for the shareholder, too. That's *eight* entries. If you don't follow this, that's OK. It took me thirty years to get where I am. I started at "single-entry" accounting and then... 
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| 24 March 2009 | |
| Octuple entry? Is that how that women got pregnant and had those 8 kids? | |
