Follow the tax rules when you borrow from your corporation

If you’re a business owner and your company lends you money, you’ll enter it in the books as a shareholder loan. However, if your return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend, taxable to you as income. Knowing what the IRS might look at may be useful when you structure the arrangement.

* First, the IRS will look at your relationship to the company. If you’re the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you’re one of several shareholders and none of the others received similar payments, that suggests it might be a genuine loan.

* Next, the IRS will look at the details of the loan. Did you sign a formal promissory note? Did you pledge any security against the loan? Does the loan have a specific maturity date, or is there a repayment schedule? What rate of interest are you paying? Have you missed any payments, and if so, has the company tried to collect them? The more businesslike the terms of the loan, the more it will appear to be a genuine debt.

* Finally, the IRS will consider other factors. Is your company paying you a salary that’s in line with the work you perform? Has the company paid dividends, or is this the only payment to its shareholder? Is the size of the loan within your ability to repay? How does the size of the loan compare to the company’s profits?

Whether the IRS will try to tax you on the “loan” will depend on all these factors. If you’ve paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you’d like more information about borrowing money from your closely held corporation.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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