September 29, 2017
Making a Loan to Your Company is Complicated
Loan or Capital Contribution
Have you given a loan to your company as a business owner? Is that transaction recorded as a liability payable back to you? If you answered “yes” to these questions, you may be at risk for the IRS ruling that your business decision will be reclassified as a capital contribution.
Your intentions for lending the money to your company are not sufficient evidence for the IRS to allow this financial activity to be recorded as a liability. However, here is a simple strategy you can take to ensure loan treatment.
Execute a basic loan agreement or issue a promissory note, that includes a fixed maturity date and interest paid to yourself. If you are uncertain how to properly execute this process, we are here to help with sample repayment documents, assistance calculating interest a to record interest properly. This proactive approach will ensure that payments you receive back on this fiscal option will not be considered distributions by the IRS.
If the money is treated as distributions, any amount which exceeds your basis in the company will be treated as a capital gain on your individual tax return. You may end up paying tax on what you thought were loan transactions!
Another benefit of structuring this repayment correctly is that any bona fide debt that becomes worthless within the tax year would also be allowed as a deduction. Contact us today to review your financial situation.