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Old 02-17-2017, 09:37 AM
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Repayment of Loan from Shareholder

I am in the process of preparing an S Corp tax for 2015 for a sole S corp owner. As per his ending balance sheet for 2015, he is showing a loan that he took out from his S corp on Dec 31, 2014 which he did not repay in 2015. My understanding is that this loan has to be fully paid in 2015 which he did not. Since it was was not paid in 2015, he would need to report it as an income on his personal tax return which he did not filed as yet.

My question is if he report this as an income in 2015, how do I adjust his corp books for 2015 to bring that loan to $0.00.

Thank you



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Old 02-17-2017, 07:08 PM
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Originally Posted by minim84 View Post
I am in the process of preparing an S Corp tax for 2015 for a sole S corp owner. As per his ending balance sheet for 2015, he is showing a loan that he took out from his S corp on Dec 31, 2014 which he did not repay in 2015. My understanding is that this loan has to be fully paid in 2015 which he did not. Since it was was not paid in 2015, he would need to report it as an income on his personal tax return which he did not filed as yet.

My question is if he report this as an income in 2015, how do I adjust his corp books for 2015 to bring that loan to $0.00.

Thank you
When you pay back a shareholder loan, the general ledger entry is recorded as a debit to cash and as a credit to Notes Payable Officers. it is not uncommon for S corp shareholders to make cash advances to the corp during years when the company?s operating results are unfavorable or cash is tight. In return shareholders get an increase in their basis that they can use to deduct additional flow-through losses. It?s also not unusual for the corp to repay these advances when operating results are more favorable. Unfortunately, however, if the parties treat the advance as debt and the shareholder uses the debt basis to absorb flow-through losses, any loan repayment may subject the shareholder to capital gain, or worse, ordinary income. Shareholders run into problems when they have reduced or depleted their debt basis and the corp repays any part of a shareholder loan. When the company repays a loan where the shareholder?s debt basis is less than the face value of the loan, the shareholder must take a portion of the repayment into income. - See more at: Revenue ruling 64-162
Whether shareholders recognize ordinary or capital gain income depends on the nature of the loans in their hands. IRC section 1271(a)(1) provides that retirement of debt instruments are exchanges. Thus, if a loan is evidenced by a note, the income portion of the repayment is considered capital because the note is considered capital in the shareholder?s hands. If the loan is an ?open account,? or a loan not evidenced by a note, the income portion of the repayment is ordinary income.



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Old 02-18-2017, 08:25 AM
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Repayment of Loan From Shareholder

Thank you for your answer. If i make that journal entry as you suggested debiting Cash and crediting Notes Payable it would increase the cash balance in the business account which is not correct because the shareholder is not depositing any money in the business account to repay this loan he is just reporting this loan as an ordinary income on his personal tax return since the loan was not paid back within a year.Any other suggestions would be appreciated, thanks again.



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Old 02-18-2017, 10:03 AM
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Originally Posted by minim84 View Post
Thank you for your answer. If i make that journal entry as you suggested debiting Cash and crediting Notes Payable it would increase the cash balance in the business account which is not correct because the shareholder is not depositing any money in the business account to repay this loan he is just reporting this loan as an ordinary income on his personal tax return since the loan was not paid back within a year.Any other suggestions would be appreciated, thanks again.
I am in the process of preparing an S Corp tax for 2015 for a sole S corp owner. As per his ending balance sheet for 2015, he is showing a loan that he took out from his S corp on Dec 31, 2014 which he did not repay in 2015. My understanding is that this loan has to be fully paid in 2015 which he did not. Since it was was not paid in 2015, he would need to report it as an income on his personal tax return which he did not filed as yet.======> I guess it is not clear ;however, How do we need to treat the defaulted owner/ shareholder's loan from the s corp?? The case is a S CORP MAKING A LOAN TO THE SHAREHOLDER. My research/ reading show that any distribution from a S Corp is either taxable (dividends or preferably in general distributions ) or nontaxable (distribution from the S corp?s AAA). I guess the S corp loan was NOT from AE&P/ AAA. However, say, the S corp loan was from either AE&P or AAA and If the shareholder had repaid the loan, his/her basis would have been increased. Now that the loan is uncollectable (shareholder hasn't paid), I believe the S corp should remove the loan from its books and let the shareholder know his/her new balance (a decrease) based on that bad loan. I don't think this is correct, since the loan is not AAA, but assets on SCh L of 1120S. So the AAA should not have been reduced. Any S corp loan to the s/h is tax free as a loan, as an S corp loan to the S corp would be tax free and not income to the S corp either. Whether the debtor re-pays the loan or not determines whether there is income or not. Re-pay the loan, no income nor expense.However, Interest that has accrued for 2015 should be credited to interest income and passed directly to the shareholders on sch K-1 of 1120S I guess. The other side of the entry will be a debit either to Accrued Interest Receivable or the the loan balance itself. I alos guess either way is correct, just depends on how you want to break it down. The S corp has a loan receivable from the shareholder in the amount of a certain dollars. The shareholder did not pay the interest at year end of 2015 so I credit interest income for aa certain dollars. and the other side of this entry is the accrued int receivable I guess so


My question is if he report this as an income in 2015, how do I adjust his corp books for 2015 to bring that loan to $0.00.=======>As mentioned above.



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