| Over the years, I've taken out $50k in shareholder loans. This I know I'm on the hook for and there's no way I can pay this back in a lump sum now. I know I'll take some sort of tax hit on this (I'm pretty sure it will have to be taxed as income, as I recall, speaking with my accountant). ========>>>>>>>>>>>>>iN GENERAL, CORRECT; AS YOU said, This situation raises a red flag for the auditor;I t's not an uncommon occurrence. An IRS auditor spots funds moving from a corp to its owner/EE . The
checks are labeled loans. However, there are no formal loan agreements, no indication that interest was
charged, and no evidence that there has been any repayment.. In fact, it raises red flags: were the checks bona fide loans or disguised shareholder distribution? if the checks were bona fide loans, is the failure to charge interest a taxable event under the tax
code's below-market loan provision?; the best way to convince the IRS of that fact is to follow
all of the formalities, just as if the corporation were loaning funds to a stranger. Things like promissory
notes, repayment schedules, a reasonable interest rate charge, and a track record of repayments-even if
not perfect-can go a long way toward persuading an IRS auditor that the parties intended the payments to
be loans.
S Corp has a maxed out business line of credit of 50k with no personal guarantee. They've called the full amount due last month.
1. Is the IRS going to treat the 1099 for forgiven debt that is the responsibility of the S corp as income? ============>>>>>>>>>>>>>>>I think so; An S corp derives income when a creditor discharges the S corp from a debt. The income derived from the cancellation of indebtedness of an S corp is not distributed to the shareholders of an S corp. However the income that each share holder derives generally from an S corp is subject to taxation .as said above;
2. Because of the pass-through nature of the S-corp, is this debt going to be considered income, attributed to me personally? If I have $100k of extra "income" on my returns this year, I should go visit some personal bankruptcy forums========== itdependsFor the purpose of taxation, an S corpand its share holders are considered two separate entities. The method adopted for taxing an S corp and partnership is same. But the rules adopted for distribution of Cancellation of Debt Income in an S corp is different from that of a partnership.As mentioned earlier, the income of a shareholder does not increase with the cancellation of indebtedness. It is only the general income, tax credits, and deductions of the S corp that are distributed at the shareholder level. As an exception to the general rule, the income that arises from the discharge of debt that is made before October, 12, 2001 and March, 1, 2002 under the bankruptcy proceedings is distributed among the shareholders.However, the liability of an S corp in insolvency, bankruptcy and indebtedness is not distributed at the shareholder level of an S corp. Similarly the income that is received from the discharge of debt due to insolvency and bankruptcy is distributed at the corporation level and it is not distributed at the shareholder level.
Occasionally, a loss incurred by an S corp is also not distributed among the shareholders. Hence such losses are considered income to the shareholders and it is called Net Operating Losses . An NOL is reduced from the gross income of the S corp. The income derived from the discharge of indebtedness is also excluded from the gross income of an S corp.
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S-Corp Business Debt and S Corp Shareholder Loan 
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