Discussion:Shareholder loan to C Corporation
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BARBOLEARY (talk|edits) said: | 15 August 2006 |
| If a person made a business loan to his C Corporation, the C Corporation went out of business and never repaid the loan, how does the individual report this loss on his individual return? | |
KatanDalet (talk|edits) said: | 15 August 2006 |
| I had a similar situation with a client, except he died and the C corp went out of business. The widow inherited the outstanding loan plus his 100% stock.
See Master Tax Guide section 1145 for business bad debts. In her case, I treated it as non-business bad debt ($3000 write off per year). Your case may be different. See also section 2253 corporate liquidation to deal with gain or loss on stock. See sections 1752 and 1754 for loss limitations and carryovers. I undoubtedly took the more conservative road given she was not the shareholder, and I think I made the right choice. Maybe this will point you in the right direction. | |
Janakpatel (talk|edits) said: | 15 August 2006 |
| KD
right on. I did same and treated as non business debt. | |
| 16 August 2006 | |
| Most times that will be correct. However, if the shareholder-employee makes the loan to the corporation in order to secure his job, it could be considered a business loan and thus treated as an ordinary loss rather than a capital loss. Better treatment, but be careful that you can show the loan was made for the purpose of securing the employment and not for an investment. | |
Green hunter (talk|edits) said: | 16 August 2006 |
| KD - for your clients sake it probably would be beneficial to treat this as a business loan. As JD stated I would inquire as to the purpose of the loan perosnally, if you can document it i would take the ordinary loss. Finally, are you sure this is a business loan vs. a capital contribution. For example, was it documented and executed as a loan was interest charged... | |
KatanDalet (talk|edits) said: | 18 August 2006 |
| GH, My client was the only employee, the manager, and 100% owner of C Corp. The loan was documented on B/S and interest was accrued on books. The loan kept the business operating in the black. Do you still think it should have been considered business loan for ordinary loss? I was afraid the widow's inheriting the loan and stock would prevent her treatment being ordinary. | |
| 18 August 2006 | |
| Just a question, can you convert the loan into investment Common Stock, and take a Section 1244 deduction (ordinary loss)? | |
| 12 September 2006 | |
| My current situation is similar to the ones being discussed. My husband and I each own 50% of the common stock of our C corp. We created a line of credit from the shareholders (us) to the corporation. Interest was accrued at 8% (this started in 2001 or so). Some payments were made for 2 or 3 years, and the interest was reported on our individual return and deducted on our corp return. The corporation was in the red every year, so we stopped paying ourselves a salary pretty early in the process. (This was our fulltime employment during that time, but we weren't drawing a salary because we were in the red overall -- we personally lived off of our savings.) Basically, the corporation hasn't paid any taxes -- corporate or payroll -- in a long time. We have filed all forms, both fed and state, in a timely manner. We now want to dissolve the corporation as we are no longer operating the company. The question now is what to do with this loan. Was it really a loan? How do we maximize our personal loss on our personal taxes, etc.? | |
