Well, the IRS expects that for any loans that are made to a Corporation are properly recorded on the balance sheet of a Corporation as a Liability under a section called loans from Officers/shareholders.
Furthermore, there should be proper documentation on the corporation minutes that approves such shareholder loans to the corporation. This loan must be accompanied by some formal interest rate payable on this loan, a loan period should be specified along with the amount of monthly repayment.
If the corporation is not able to make timely monthtly repayments on this loan then a proper interest accrual is to be made on the loan, in other words the books should record interest paid to the shareholder. This accrual or interest paid must be aggregated at end of the year and a 1099-Interest is be prepared on the total interest paid to the shareholder (or amount accrued) and reported to the IRS.
This means effectively, that the corporation is would be expensing the interest paid on its books, and the shareholder/officer of the corporation will be reporting interest income received from the corporation or accrued on the books of the corporation.
If the above rules are not observed, the IRS can impose penalties and interest on the individual shareholder/officer for underreporting income and can also recharacterise these loans as additional paid in capital instead of loans. This is a more serious outcome and consequences are that the shareholder would not be able to be repaid on his loan!
Last edited by TaxGuru : 03-11-2007 at 12:46 AM.