S Corp Shareholder Basis

[SunTaxMan]

Two 50% shareholders borrowed money to buy/start a business. Bank commercial loan has both women's residences as collateral on the loan. Residences are not involved in the business. Loan documents describe loan as "Commercial Loan," not "Home Mortgage." No 1098 issued.

Does the apportioned % of value of the homes become basis for the shareholders?

Does the amount of the loan constitute basis, calculated by the apportion of collateral value for the loan? The FMV of their homes is approximately the same - the homes are similar size, quality, in the same residential development.

No other funds have been "invested" in this business except this commercial loan.

Do these shareholders have basis because of this loan collateral?

Comments appreciated.

[kcjenkins]

Are the loan papers made out to them personally, or to the business?

And is the business a partnership? Or an LLC? Or an S Corp?

[bay]

It has been a couple of years since I did the research on this issue for another client - but when I looked at this issue even if a shareholder personal guaranteed a loan such personal quarantee did not increase their basis in such corporation. Therefore I would say that based upon your facts, no the shareholder's basis does not increase by using the house as collateral.

Good Luck

[joelgilb]

It has been a couple of years since I did the research on this issue for another client - but when I looked at this issue even if a shareholder personal guaranteed a loan such personal quarantee did not increase their basis in such corporation. Therefore I would say that based upon your facts, no the shareholder's basis does not increase by using the house as collateral.

Good Luck

Agreed. The money they put in from the loans is the only basis they will get here. Unless of course they put their houses into the partnership by transferring title, something they probably won't and shouldn't do.

[SunTaxMan]

1.

Are the loan papers made out to them personally, or to the business?

2. And is the business a partnership? Or an LLC? Or an S Corp?

KC.

1. Loan is in business name.

2. S-Corp.

[SunTaxMan]

Joel,

You said, "Agreed. The money they put in from the loans is the only basis they will get here. Unless of course they put their houses into the partnership by transferring title, something they probably won't and shouldn't do."

They did not "put in" money from the loan - the bank did. Loan proceeds was in the form of a check payable to the Company (S-Corp), not the owners of the Real Estate.

[Maribeth]

Joel,

You said, "Agreed. The money they put in from the loans is the only basis they will get here. Unless of course they put their houses into the partnership by transferring title, something they probably won't and shouldn't do."

They did not "put in" money from the loan - the bank did. Loan proceeds was in the form of a check payable to the Company (S-Corp), not the owners of the Real Estate.

If the loan was issued to the corporation, is in the corporation's name, and the shareholders are only personally guaranteeing the loan through the use of their home equity, then the shareholders have NO BASIS in the corporation. A personal quarantee cannot increase basis.

What should have happened: the shareholders took out the loan personally and loaned/contributed the proceeds to the corporation. They might be able to restructure the transaction if it is not too late.

Maribeth

[Catherine]

If the loan was issued to the corporation, is in the corporation's name, and the shareholders are only personally guaranteeing the loan through the use of their home equity, then the shareholders have NO BASIS in the corporation. A personal quarantee cannot increase basis.

What should have happened: the shareholders took out the loan personally and loaned/contributed the proceeds to the corporation. They might be able to restructure the transaction if it is not too late.

Maribeth

Here's a twist from an S-corp client of mine. Tells me now (on extension; I called with an unrelated question) that her dad took out an equity loan and gave her the $$ so she could buy her business (Jan '06). Has been paying back by taking distributions herself and repaying dear old dad. Now she wants to know if she should be doing it this way and what effect it has on her business. And when will I have her returns done?

I asked last year how she got the business set up and going... did any of this get mentioned then? Hollow laugh! Now I get to figure out what to do next.

Catherine

[joelgilb]

Joel,

You said, "Agreed. The money they put in from the loans is the only basis they will get here. Unless of course they put their houses into the partnership by transferring title, something they probably won't and shouldn't do."

They did not "put in" money from the loan - the bank did. Loan proceeds was in the form of a check payable to the Company (S-Corp), not the owners of the Real Estate.

I see. I presumed they took out the loan personally and then put the money in. Maribeth is correct then, they have a basis problem unless they can somehow restructure the transaction.

I am sure they won't want to do this, but they might be able to deed a portion of their houses, possibly to the extent of debt the corp owes that they guaranteed to create basis.

Also, have you seen the loan documents from the lender? Are you sure the corp was the one that recived the money and owes on the loan or is this what your client is telling you? You would be amazed at how often our clients really don't understand what they legally entered into.

[SunTaxMan]

Also, have you seen the loan documents from the lender? Are you sure the corp was the one that recived the money and owes on the loan or is this what your client is telling you? You would be amazed at how often our clients really don't understand what they legally entered into.

Loan agreement is made out to the Company, not the Shareholders.

Loan proceeds were either (1) paid directly to lienholders as part of the purchase or, (2) deposited into Company checking account (in the same bank). Shareholders got $3,000 directly to their personal account because (according the shareholder) they did not have Company checks printed yet and needed to "pay some bills" immediately.

I appreciate the comments and insight.