Borrowing
from your closely held corporation may seem simple, but without proper planning
it can be painfully expensive. The IRS often reviews such loans to determine if
they’re merely disguised cash withdrawals. For example, the IRS may treat an
improperly structured loan as a dividend, which would be taxable to you and not
deductible by the corporation.
The
IRS generally asks the following questions when evaluating a corporation’s loan
to one of its shareholders:
●
Does
the borrowing shareholder control the corporation? The greater the degree of
control, the more closely the loan will be scrutinized.
●
Did
the corporation require adequate collateral for the loan?
●
Is
the borrower financially able to repay the loan within a reasonable time
period?
●
Did
the shareholder sign a promissory note with an appropriate interest rate, a
reasonable repayment schedule, and a fixed maturity date?
●
Has
the borrower been making the required payments on schedule?
●
If
the borrower missed one or more payments, has the corporation tried to collect?
When
a corporation lends money to one of its shareholders, the transaction should be
structured as though it were being made to an unrelated party – a stranger. The
borrower should sign a promissory note that includes payment terms and a final
due date. At a minimum, interest should be charged at the IRS statutory rate in
effect at the time of the loan. Requiring adequate collateral will be regarded
as a favorable indicator by the IRS, although it is not mandatory. The terms of
the loan should be voted on by the Board of Directors, and the details should
be entered into the corporate minutes. The borrower should make payments
according to the agreed-upon schedule.
Since
circumstances are different for each corporation and each shareholder, you
should always consult your accountant before transferring money from your
company. If we can be of assistance, call us.
Call us at (219)
769-3616 with your questions, or email them to rzondor@swartz-retson.com
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