|
You already know that taxes can be imposed on money taken out of your C corporation. But not all business owners know they can also be taxed on money put into the corporation in the form of a loan.
|
Stockholders who lend money to their C corporations are expected to charge interest on the loan at the market rate. Those who charge less — or nothing — can be taxed as if they charged interest at a rate that is periodically determined by the IRS under federal law. |
Specifically, the difference between that interest rate and the lesser (or zero) rate actually charged by a stockholder is taxable to the stockholder as interest income. The corporation is also allowed a corresponding deduction.
This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursed, also counts as a loan.
The IRS is alerted to these type of loans by the corporation's tax return, which asks about "loans from stockholders." Here are three quick tips to avoid problems:
 Review any loans or expense advances made to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.
You may want to convert all, or part, of the loan to a capital contribution or purchase of stock. Consult with your tax adviser about the best way to capitalize your business.
Consider formalizing the transaction by fixing an interest rate and payment schedule. Your tax adviser can suggest an acceptable interest rate that will stop the IRS from taxing you at a higher rate later if interest rates rise while the debt is outstanding. Keep good records showing that loan payments were made on schedule.
For more information call Thomas Roy, CPA at 860-721-5786 or email at tomroy@crandg.com. |
|
Full Newsletter
