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Newsletter |
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Dangers in
Shareholder Loans Continue
Loans between shareholders to closely held corporations are subject to
special tax scrutiny and, if not properly documented, can produce
adverse tax results.
Loans from corporations to shareholders are the subject of an IRS Market
Segment Specialization Plan Audit Guide. The IRS also continues to
vigorously litigate the status of losses from shareholder loans to
closely held corporations. Either way, loans from or loans to, these
arrangements must meet certain minimum standards. Here's a list of the
most important ones.
- Loans must be evidenced by a written unconditional promise to pay.
- Loans must be due on demand or on a stated due date.
- A rate of interest must be stated or determinable by reference to a
published rate.
- The borrower must be creditworthy.
- Payments of principal and interest must be commercially reasonable (no
payments,
for years, while interest accrues does NOT meet the standard).
- A source of repayment other than future income should be clearly
identified and a
collateral interest established.
Protecting the classification of a loan can mean the difference between
ordinary loss and capital loss treatment when a shareholder loan to a
corporation cannot be repaid. Going the other way, payments to a
shareholder that are not well documented as loans can be reclassified by
the IRS as distributions -- taxable dividends or distributions in excess
of basis taxable as capital gains. Either way, these are bad outcomes
for the individual shareholder.
Now is the time to clean up loan documentation and start making regular
payments of principal and interest. In some cases, it may be advisable
to borrow from a bank and pay off shareholder loans for a period of two
or three months. That would be good evidence that the amount was a bona
fide loan.
We can assist you with proper loan documentation and can help you
protect your transactions from IRS attack. Call for an appointment to
discuss the specifics of your shareholder loans. |
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