Discussion:To clarify tax case-personal loan guarantee s corp shareholder
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Discussion Forum Index --> Tax Questions --> To clarify tax case-personal loan guarantee s corp shareholder
| 5 March 2007 | |
| To all experienced tax almanancers,
Please refer to page 73 in this month's Journal of Accountancy. The tax case regarding personal loan guarantees as basis. As I understand from the article, the IRS will permit a s-corp shareholder to borrow money and loan it to the s-corp and let the s-corp assume the liability ONLY if the shareholder has assumed a personal guarantee. How is this different? An s-corp borrows money directly through the s-corp, but the loan is personally guaranteed with assets of the sole shareholder. How will this affect the tax consequences of the shareholder? Thank you, | |
| March 5, 2007 | |
| Haven't read, not certified, so don't read JoA, but as you summarized it, the key point is that the S/H did loan the money to the corp, and then the corp repaid the loan directly. That's never been a problem, and is way different than the corp borrowing the money and repaying it. The issue has always been whether it's a S/H loan or corp loan. The personal guarantee doesn't change the nature of that first issue. | |
| 5 March 2007 | |
| Not sure that either of those strategies will work except in very limited circumstances, and even then, only in certain Appellate Court circuits. In which state do you practice? | |
| 5 March 2007 | |
| Please clarify JR1, when you say, "the personal guarantee doesn't change the nature.." The nature of how the loan is treated? Maybe you mean it doesn't increase my basis, which makes sense to me.
I believe though, that since this loan is backed by my personal assets, I can deduct the interest on my Sch A. (I guess it doesn't matter where it's deducted as long as I am the sole shareholder). | |
| 5 March 2007 | |
| Personal guarantee makes it recourse, no? Essentially the way I read it, funds received from a non recourse liability have no basis and cannot add basis. Does this surprise anyone? | |
| 5 March 2007 | |
| Ohio is in the Sixth Circuit which basically takes the position that a personal guarantee or pledge of personal assets (or even a shareholder as co-signer) does not create debt basis. See Malloof v. Commissioner., 98 AFTR 2d 2006-5832. This was a 2006 case which affirmed the Tax Court's position on this issue. | |
| March 5, 2007 | |
| Personal guarantees are not adequate to establish basis in an S. There was a great comment on another thread apparently...about how you're not at risk on a guaranteed loan until the S corp fails. It's first in line. Anyway, this has been consistent all along. The S/H must loan the money to the S for basis. Big difference in an LLC, where any debt counts as basis. | |
| 5 March 2007 | |
| As I understand this we are not talking about a personal guarantee of an S Corp loan but a case where shareholder borrows the money personally, loans it to the Corp and then has the Corp assume liability for the loan. The position seems to be quite logically that any basis created on the loan to the Corp is removed when shareholder's liability to repay ends. | |
| 5 March 2007 | |
| Just because the S corp agrees to pay the loan doesn't mean that the bank releases the shareholder from liability. | |
| 5 March 2007 | |
| Not what the article says. Says if no liability to repay, no basis. And if liability is secondary to Corp no basis until called upon. | |
| 5 March 2007 | |
| Who do you think the bank expects to pay the note? They lent to the shareholder. Unless they release the SH from the note and accept the S corp as being on the hook (which never happens for my size client, maybe for others it does?), the SH is still liable, in the banks mind. That the S corp makes the payments is no different than having the S Corp make the payment on someone's personal credit card which was used to pay corporate expenses. When I charge paper at Office Depot, it is me who is liable to American Express. The fact that my S corp agrees to pay the bill directly, instead of reimbursing me, does not make me any less liable to American Express. | |
| 5 March 2007 | |
| OK Kevin, then what do you suppose the article is saying, or what JR and Riley are talking about? Precisely what I am saying is that a shareholder guarantee of a corporate obligation does not create basis until the shareholder actually pays. If personal liability is not removed by corporate assumption basis remains. | |
| 5 March 2007 | |
| I didn't read the article either, but I agree with JR1, if a corp borrows money and the SH guarantees the loan, that does not create "at risk" basis for the SH unless and until the SH actually pays it. See Rev. Rul 70-50 and IRC Sec. 1366(d)(1). and Proposed Reg §1.465-6(d) This is the intent of IRC Sec. 465 | |
| 5 March 2007 | |
| You've lost me. Exactly what did I say that you disagree with? | |
| 2007-04-10 | |
| Oh, dear.... The hours I intended to spend doing books (which are done other than me properly allocating accounts) has been spent on this site... Please excuse my bluntness in directly addressing these questions, & wish me the best in understanding the answer...
Situation: s corp got license pulled by medicare (no legal action)in June 2006. Neither share holder deal, ended up in 20,000 debt after makikng less than 150,000 in a year. the year before s corp had made $400,000+ not counting costs. I marry the CEO & start doing books. We find out debt was guaranteed. I wanted to convince him to contribute asset from his sole-proprietorship to liquidate. the one asset s corp has doesn't half-way cover debt. we didn't file a 966 or anything else. Salaries received were 12,000 before crash, meanwhile company card was being used for everything under sun (i.e. personal). I've considered listing at owner's draw, then read this thinking the loan he got blamed for could be considered a loan to the s corp, in which case I probably don't have to worry so much about capital draw equity issue. I'm not impressed with anything his prior tax consultant did, but don't wanna end up in H&R Block, either. lol. If I can't figure out how to most economically associate debt liability & officer's misc compensation then I can't even get the ball rolling with a meeting between 2 shareholders who I'm pushing to liquidate little had. If I do find pro help, I doubt they'd hold hand that much, and I want the bank to clarify nature of loan (as I think there are apparent violations of California Statute of Consumer Affairs though those statutes only protect personal acconts, not business collections). I recognize I need a professional, and will gladly take advice on how to find one, but as we're so in debt & they rely solely on me for now, this responsibility has me blanking staring at QuickBooks Accountant Premeirs Edition wishing I had any idea how these records should be kept to help 1.)persuade cause for liquidation & possible asset contributions at meeting 2.) beg bank creditor to recognize dissolving s-corp will have more power to repay loan than we will, & 3.) pray that this or threats of schedule 7 bankruptcy will allow corp to pick up debt & corrections made to our(his) credit reports. We've got secured debts like our home that drive us while the other previous shareholder (not involved) has not yet been informed of tax-risks they each are exposed to if irs closes corp before it's done properly by officers. is a pro on this level hella' expensive? I swear that's all I will say, sorry for long letter, but I'm not educated in matter till recently and scared so hoped giving full story might catch one eye to enlighten a direction I should take. Debt becomes loan? Loan becomes debt? Advantage? Capital gain/loss? eek!!!!!! | |
Bottom Line (talk|edits) said: | 11 April 2007 |
| Sounds like you need a CPA and an attorney. There's way to many issues to be addressed here. Extend your taxes and take your time interviewing professionals to help you. | |
| 2007-04-11 | |
| Does anyone have recommendations on finding professionals? Is there any advertised forum of locals here? I really don't want to stoop to Yellow Pages, and appreciate any suggestions.... | |
| 11 April 2007 | |
| How to find a professional tax preparer Some very astute people are quoted here. | |
Actionbsns (talk|edits) said: | 28 April 2007 |
| My client is a C corp. They have borrowed money from a local credit union who has indicated the loan is a business loan, in the name of the client (not the corp), and secured by a boat owned by the corporation. My question involves what to do with the interst. No 1099 was sent out, so in that regard this would be consumer interest. The corporation services the debt and is at risk of losing a major asset if payments are not made. So can I put it on the corporate books and tax return without affecting the personal return? | |
| 28 April 2007 | |
| C Corp has no problem with basis, Paula. On the books is fine.♫ | |
