Cornbelt Financial
  • Home
  • About
  • Pricing
    • Tax Prep & Planning
    • Financial Planning
    • Investment Advising
    • Individual & Business Succession Planning
    • Business Valuation
    • 401k Plan Advisory
    • Bookkeeping
  • Contact
  • Resources
    • Investors
    • Industries
    • Values
    • Blog
    • Tax Firm Solutions
  • Upload
  • Home
  • About
  • Pricing
    • Tax Prep & Planning
    • Financial Planning
    • Investment Advising
    • Individual & Business Succession Planning
    • Business Valuation
    • 401k Plan Advisory
    • Bookkeeping
  • Contact
  • Resources
    • Investors
    • Industries
    • Values
    • Blog
    • Tax Firm Solutions
  • Upload

Dot the “i’s” and cross the “t’s” on loans between your business and its owners

6/15/2017

0 Comments

 
Picture
It’s common for closely held businesses to transfer money into and out of the company, often in the form of a loan. However, the IRS looks closely at such transactions: Are they truly loans, or actually compensation, distributions or contributions to equity?

Loans to owners

When an owner withdraws funds from the company, the transaction can be characterized as compensation, a distribution or a loan. Loans aren’t taxable, but compensation is and distributions may be.

If the company is a C corporation and the transaction is considered a distribution, it can trigger double taxation. If a transaction is considered compensation, it’s deductible by the corporation, so it doesn’t result in double taxation — but it will be taxable to the owner and subject to payroll taxes.

If the company is an S corporation or other pass-through entity and the transaction is considered a distribution, there’s no entity-level tax, so double taxation won’t be an issue. But distributions reduce an owner’s tax basis, which makes it harder to deduct business losses. If the transaction is considered compensation, as with a C corporation, it will be taxable to the owner and subject to payroll taxes.

Loans to the business

There are also benefits to treating transfers of money from owners to the business as loans. If such advances are treated as contributions to equity, for example, any reimbursements by the company may be taxed as distributions.
Loan payments, on the other hand, aren’t taxable, apart from the interest, which is deductible by the company. A loan may also give the owner an advantage in the event of the company’s bankruptcy, because debt obligations are paid before equity is returned.

Is it a loan or not?

To enjoy the tax advantages of a loan, it’s important to establish that a transaction is truly a loan. Simply calling a withdrawal or advance a “loan” doesn’t make it so.

Whether a transaction is a loan is a matter of intent. It’s a loan if the borrower has an unconditional intent to repay the amount received and the lender has an unconditional intent to obtain repayment. Because the IRS and the courts aren’t mind readers, it’s critical to document loans and treat them like other arm’s-length transactions. This includes:
  • Executing a promissory note,
  • Charging a commercially reasonable rate of interest — generally, no less than the applicable federal rate,
  • Establishing and following a fixed repayment schedule,
  • Securing the loan using appropriate collateral, which will also give the lender bankruptcy priority over unsecured creditors,
  • Treating the transaction as a loan in the company’s books, and
  • Ensuring that the lender makes reasonable efforts to collect in case of default.
Also, to avoid a claim that loans to owner-employees are disguised compensation, you must ensure that they receive reasonable salaries.

If you’re considering a loan to or from your business, contact us for more details on how to help ensure it will be considered a loan by the IRS.

​© 2017
0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Author

    Adam Carr, MBA, EA

    Archives

    May 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    February 2016
    January 2016
    December 2015
    November 2015

    Categories

    All
    Business
    Charity
    Education
    Estate Planning
    Identity Protection
    Investments
    Life Events
    Medical
    Real Estate
    Tax Forms
    Tax Law
    Tax Planning
    Tax Reform

    RSS Feed

© COPYRIGHT Cornbelt Financial, LLC 2018. ALL RIGHTS RESERVED.

There are no warranties implied.
Cornbelt Financial, LLC (“RIA Firm”) is a registered investment advisor located in Denver, Colorado. Cornbelt Financial, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Cornbelt Financial, LLC’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Cornbelt Financial, LLC’s website on the internet should not be construed by any consumer and/or prospective client as Cornbelt FInancial, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by Cornbelt Financial, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Cornbelt Financial, LLC, please contact the state securities regulators for those states in which Cornbelt Financial, LLC maintains a registration filing. A copy of Cornbelt Financial, LLC’s current written disclosure statement discussing Cornbelt Financial, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Cornbelt Financial, LLC upon written request. Cornbelt Financial, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Cornbelt Financial, LLC’s website or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
This website and information are provided for guidance and information purposes only.  Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy.  This website and information are not intended to provide investment, tax, or legal advice.
Insurance products and services are offered and sold through individually licensed and appointed insurance agents.