Due to our current economic climate, clients are asking our advice about the taxable consequences and best practices to borrow funds from their own companies.
Shareholder loans “from” a corporation
Loans “from” your business may not be the best way to distribute money to avoid paying income taxes. The IRS has placed strict rules on this practice, in that the loan could be taxed as a capital gain to you personally. Judy Bernhard, CPA here, and I am the Resident Tax Manager with Killingsworth Spencer CPAs. The items to have in place in taking a shareholder loan include a loan document with a declared interest rate that should be at least the then current short-term Applicable Federal Rate (AFR), published monthly, or a blended rate for the year. The loan must be recorded on the Company balance sheet, which will be part of your business tax return. Also, the Borrower-shareholder must also be an employee with W-2 wages and withholding. Please note: If you are the Company’s sole shareholder, a cash basis taxpayer, and you are in complete control of your earnings (wages and distributions), this significantly weakens your argument that a shareholder loan is valid.
Shareholder loans “to” a corporation –
Capitalization of a corporation under your control as a shareholder can be classified in two ways – equity contribution or debt. Money put into a company that does not require repayment is considered equity and contributes to basis. Money that is expected to be repaid is considered a loan. Any money contributed to a company, either an equity contribution or debt, is NOT tax deductible.
If you have other questions or concerns about the use of a shareholder loan in your enterprise, please give us a call at 770-552-8286.