Handle Shareholder Loans with Caution

Handle Shareholder Loans with Caution

Handle Shareholder Loans with Caution

If you’re a shareholder in a closely held C corporation, you are permitted to take loans or advances from the company. It’s convenient and, typically, as a shareholder, you won’t have to pay taxes on the proceeds. What’s not to like about this opportunity? Clearly, it’s a convenient benefit. Still, you should be careful that, when borrowing from your corporation, the loan is arranged in a businesslike manner. Otherwise, the IRS could reclassify your loan or advance as a dividend, which would be taxable to you individually and not deductible by the corporation. The Right Way To Arrange a Shareholder Loan Generally, whether a disbursement to a shareholder will be considered a bona fide loan for tax purposes depends on whether, at the time of the distribution, the shareholder intended to repay it and the corporation intended to require repayment. When borrowing from your corporation, be sure the terms of the loan are in writing. The loan document should also clearly state that a reasonable interest rate is being charged on the loan. Finally, have the note signed and dated by you and your corporation. If the IRS audits you or your business, it will most likely review the loan carefully to determine whether the transaction is a bona fide loan or a constructive dividend. The IRS looks at numerous factors to help make that determination, such as: The security given for the advance The shareholder’s ability to repay the advance Whether the loan matures on a specific date The extent to which the shareholder controls the corporation The amount of the loan or advance Whether the corporation makes systematic attempts to obtain repayment The earnings and dividend history of the corporation How the corporation records the advances on its books and records Our firm would be happy to help you avoid any possible tax-related missteps if you are considering taking a loan or an advance from your closely held corporation. A dividend is taxable to the individual and not deductible by the corporation.