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Old 01-21-2012, 02:30 PM
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Loans to Shareholders

I am one of four 25% owner in an S-corp. and have a question about Loan To Shareholders. If a distribution to a shareholder was made and classified as Loan to Shareholder can that Loan to shareholder be a tax deductible expense for the year it was distributed..



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Old 01-22-2012, 01:37 AM
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“If a distribution to a shareholder was made and classified as Loan to Shareholder can that Loan to shareholder be a tax deductible expense for the year it was distributed..”----->I am NOT quite sure whst your question is: in general. A S Corp sh/owner can advance money to the S-Corp as a loan. For example , a sh/owner pays for company expenses using his personal credit card, and submits an expense report to the company for repayment. Shareholder's making loans (both ST/LT loans)to their S-Corp may take a tax deduction in the current year for losses in excess of their stock basis, but only to the extent they have loan basis. However, if you purchase the shares of an S corporation, you may receive periodic dividend payments, depending on the firm's financial situation and management's decisions. S corp distributions are periodic dividends that shareholders receive either in cash or stock as cash dividends or stock dividends. I guess you understand the difference between an S corp distribution and a shareholder loan, you can see why you can't reclassify one as another. As an S corporation shareholder, you're entitled to receive periodic dividends, in accordance with the company's bylaws and based on management's assessment of the company's cash position. When you receive a dividend check, the money is yours. If you need extra cash, you may discuss with the firm's leadership to determine whether you could get a loan. But you can't reclassify cash that's already yours as borrowed money you must repay. Maybe a related question is whether you can reclassify an S corporation dividend as a loan you're granting the company. Even in this case, you wouldn't classify the new cash injection as a loan but as an equity investment.



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Old 01-22-2012, 08:03 AM
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Thank you for your reply. To be more specific these LTS were taken by a shareholder as a vehicle to avoid taxes initially. So it came from the profit of the company, in lieu of compensation and or from line of credit. They had no basis in LTS to the S-corp prior to that nor expenses paid out of pocket. So essentially straight LTS from the company. Which my understanding is that the S-corp then cannot deduct that as business expense and it is classified as an asset to the company in the form of LTS account for respective shareholder.



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Old 01-22-2012, 08:32 AM
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“Which my understanding is that the S-corp then cannot deduct that as business expense and it is classified as an asset to the company in the form of LTS account for respective shareholder.”---->Agreed; in this particular case, LTS coming from the profit of the company can’t be deducted as business expense by the S corp UNLESS a shareholder loans money to the S corp. via a home equity loan/LOC. As long as the S corp pays the interest on a reg. basis.Then the interest is recorded as a deductible expense. The shareholder making the loan to the S-Corp may take a tax deduction in the current year for losses in excess of his/her stock basis, but only to the extent she/he has loan basis. However, there is distinctive difference between an S corp distribution and a shareholder loan, and you can't reclassify S corp distribution as a shareholder loan since you can't reclassify cash(profit/distribution of S corp or etc.) that's already yours as borrowed money you must repay.



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Old 01-22-2012, 08:53 AM
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Thank you sir.



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