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Old 09-03-2012, 04:06 AM
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Red face Business makes profit because of my loan---am I taxed?!!

I'm the 100% owner/president of a small S Corp. I often struggle unsuccessfully against my own inertia to get the company QuickBooks file in good enough shape to import data into TurboTax business. This has led to my being embarrassingly late with most 1120S filings ever since I took the company over in 2003. In fact, it was only this past week that I finally filed my 2009 & 2010 1120S forms!
(I expect this is sadly amusing if you're not me---especially if you're an accountant. That's all right. Go ahead & laugh---especially if you're willing to help me!)

When I reconciled all QuickBooks accounts recently so I could complete my overdue tax forms, I learned that, though our books had always shown a profit of about $8,000 for 2009, the business had actually lost about $8,000. That year, my wife and I were rebuilding a fire-damaged home and I was foolishly putting a lot of personal charges on company credit cards. When we completed repairs and financed the house, I deposited funds in business checking to reimburse the business.

Unfortunately, I didn't balance the credit card accounts at the end of fiscal 2009. Had I done so, I would have seen that the business owed me money and would have transferred the excess $8,000 I'd deposited in business checking to my personal account. Of course I can't do that now...

So, in my recent filing, I called the whole $16,000 I'd given the company a "Loan from Shareholder" and, knowing the IRS is picky about such loans, I made up a Note Payable on Demand between the company and myself with annual interest of 12% payable on 12/31. (Along with my 1120S, I sent the IRS a copy of the Note and an explanation of the circumstances.)

To THE QUESTION:

Having finally gotten my K-1 (from my irresponsible company!), I was just able to complete my personal taxes and was distressed to find that I got no deduction for my $8,000 (inadvertant) investment in my company. In fact, TurboTax indicates that I have to pay tax on the money I put into the company, money I had only because I'd been able to finance the fire-damaged home. This doesn't make sense to me!

I hope I'm doing something wrong or that you can advise me on a way to file that will avoid my being taxed on the very money I loaned my own company---even if it means filing an 1120X...

Thank you in advance for any counsel you can offer!
SenorN



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Old 09-03-2012, 04:11 PM
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“When I reconciled all QuickBooks accounts recently so I could complete my overdue tax forms, I learned that, though our books had always shown a profit of about $8,000 for 2009, the business had actually lost about $8,000. That year, my wife and I were rebuilding a fire-damaged home and I was foolishly putting a lot of personal charges on company credit cards.”-----> As you're the sole owner of a company, no law prevents you from using business funds for personal expenses. However, tax law and your business' structure may complicate the situation. A corporation that issues credit cards for business expenses to certain employees/shareholders usually has a clear policy on how those credit cards are to be used. These cards are intended for business use only. Many small business owners make a common mistake: They use their business checking account or business credit card to pay personal expenses. They figure it's no big deal. They'll either pretend those were business expenses and deduct them on the business tax return (illegal!). Or they'll do the right thing and exclude them from the business tax return because they were, indeed, personal. Paying those personal bills may be all someone needs to prove that the owner and the business are one and the same. After all, they share money and don't have a clean and clear separation. This is often referred to as "piercing the corporate veil," a claim through which someone suing the business might get access to your house (which you tried so hard to protect). As a business owner, it's important to keep all funds and all transactions completely separate. It's a good bookkeeping practice, and it can also be important if the business is ever involved in litigation. When it comes time to prepare tax returns, that personal expense must be reported as a distribution and counts as business income for the owner(and subject to tax on your 1040.);as a distribution, personal expense reduces the balance in the AAA /your stock basis. A shareholder's basis in an S Corp refers to the amount of money a shareholder has contributed to the corp, plus any loans to the corp. When a corp without accumulated earnings and profits (generally historic gains and losses) distributes money or property to a shareholder in excess of the shareholder's basis, the amount of the distribution in excess of basis is taxable to the shareholder as a sale of the corp's stock, a capital gain. ALSO distribution to a shareholder/EE from your corp’s AAA is NOT taxable; the AAA is a cumulative total of undistributed net income items generated by your corp. AAA is adjusted in the same fashion as a s/h’s basis.I strongly enourage you to keep your personal and business transactions as separate as possible, and keep both receipts to be able to prove, if you are asked, that you maintain a clear line between your business and personal expenditures.
“When we completed repairs and financed the house, I deposited funds in business checking to reimburse the business.Unfortunately, I didn't balance the credit card accounts at the end of fiscal 2009.”----->In this case, since you, as you said, deposited funds in business checking to reimburse the business, gave a loan to your S corp;your loan to the S corp increases your basis(loan basis) and there is no change in the balance in yur AAA acct and stock basis. Your making loan to your S-Corp may take a tax deduction in the current year for losses(AS LONG AS you carry biz operating losses) in excess of your stock basis, but only to the extent you have loan basis. Your stock basis is reduced, but not below zero, then your loan basis is reduced, but not below zero,either. Any excess negative basis(IF YOUR BASIS IS NEG.) is treated as a non-deductible loss. This excess loss is a "suspended loss" and carries over to future years indefinitely. As you, the shareholder, gave a loan to the company, then in following year(s) you must restore your loan basis before restoring your stock basis. You may restore your loan basis by giving a loan (to restore loan basis). Your adjusted stock basis and loan basis should be calculated tentatively just before the end of the year. This will give you sufficient time to make additional loans or equity investments to ensure that any losses are fully tax-deductible.

“So, in my recent filing, I called the whole $16,000 I'd given the company a "Loan from Shareholder" and, knowing the IRS is picky about such loans, I made up a Note Payable on Demand between the company and myself with annual interest of 12% payable on 12/31. (Along with my 1120S, I sent the IRS a copy of the Note and an explanation of the circumstances.)”-----> Any funds contributed by the shareholder are either capital contributions or loans from the shareholder. If the corp pays personal expenses for the convenience of the shareholder, the payment has to be reclassified as a loan from shareholder repayment or a distribution. There needs to be a very clear distinction between shareholder and corporation with these transactions and the documentation should be the same as if the transactions were with an unrelated third-party. this issue comes up in IRS audits and with bank loan renewals and applications – especially with S-Corps owned by a single shareholder. Without other shareholders to help keep things formal and a clear separation between business expenses and shareholder personal expenses, the single shareholder can get lazy and end up using their S-Corp like a personal checking account. If matched with very poor documentation, this can lead to big problems with the IRS – even loss of the S-election status in serious cases.A personal loan to a S Corp should be for a specified amount of money,$16K, in this case. IAs long as you loan funds to the S-Corp, you need to keep a record of the loan and try to have the corp make regularly scheduled repayments. If the loan exceeds $10k, the corp needs to start tracking and paying interest on the loan principal. You can even make intermittent loan to your S corp; at year end, S corp needs to document the loan balance, issues a 1099INT for the interest paid to you. HOWEVER, interest is not paid on "capital contributions" as they are just that, "capital contributions increasing your stock basis in the S corp." Repayments are a return of capital and reduce stock basis, while contributions increase stock basis. Loans are loans, increasing basis only to the extent that they are needed to take losses as described previously.

To THE QUESTION:

Having finally gotten my K-1 (from my irresponsible company!), I was just able to complete my personal taxes and was distressed to find that I got no deduction for my $8,000 (inadvertant) investment in my company. In fact, TurboTax indicates that I have to pay tax on the money I put into the company, money I had only because I'd been able to finance the fire-damaged home. This doesn't make sense to me!”-----> I am not familiar with TB; I guess you can get professional help from the tax software vendor.



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Old 09-03-2012, 08:29 PM
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Thanks for your quick and knowledgeable response WNHough!

It will take me a little time to digest all you wrote. Unfortunately, I don't have that time right now. Just wanted to thank you! I'll probably be back soon.



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