Business loan from C Corp to LLC

[TxQ]

If a business loan is made from a C Corp to an LLC, how is that treated tax-wise for each? There is common ownership between the companies. There is a loan agreement with interest charged and monthly payments are made from the LLC to the CCorp.

I've gotten different answers from different CPAs.

Thanks for any advice.

[jainen]

>>I've gotten different answers from different CPAs.<<

Did you give different details to each, or did you let them guess the details for themselves? How exactly are the entities related? Is the LLC treated as a corporation for tax purposes? What did the LLC use the money for? What was the lender's purpose in making the loan? What are the actual terms of the loan?

Frankly I don't see how you could get ANY answer at this point.

[TxQ]

>>I've gotten different answers from different CPAs.<<

Did you give different details to each, or did you let them guess the details for themselves? How exactly are the entities related? Is the LLC treated as a corporation for tax purposes? What did the LLC use the money for? What was the lender's purpose in making the loan? What are the actual terms of the loan?

Frankly I don't see how you could get ANY answer at this point.

[TxQ]

The CPAs who were asked were aware of the details - I didn't ask them to guess.

The C corp is owned by husband and wife. The LLC is also owned by the same two. The C Corp is a contracting business and the LLC is a property management company. The loan was from the C corp to the LLC for operating expenses for the LLC. The C corp had some extra income and the LLC needed operating capital. The loan is for 10 years and the interest rate is 6%.

[TAXBILLY]

What kind of entity is the LLC?

taxbilly

[TxQ]

What kind of entity is the LLC?

taxbilly

Obviously I'm not very knowledgable at all in this area, that's why i'm here asking questions of the experts.

However, I think the answer is that because we are in Texas, even though it is owned by husband and wife, it is a single member entity and is treated as a disregarded entity by the IRS.

[OldJack]

Sure a C-corp can loan money to a LLC>1040 or a LLC>1065>1040. However, if the loan is not treated in every way as an arms-length business transaction it could be reclassified as a taxable dividend to the shareholders.

I question the classification of the LLC as a single member entity for federal tax filing purposes. Your state may classify a husband-wife owned LLC as a single member LLC but the IRS has stated that a Husband-wife LLC does not qualify as a "Qualified Joint Venture" (QJV) which can elect to NOT be a partnership. The IRS website adds that, "Only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity qualify for the election". Also, see 2009 Small Business Quickfinder Handbook, pages F-6 and B-2.

[TxQ]

Sure a C-corp can loan money to a LLC>1040 or a LLC>1065>1040. However, if the loan is not treated in every way as an arms-length business transaction it could be reclassified as a taxable dividend to the shareholders.

I question the classification of the LLC as a single member entity for federal tax filing purposes. Your state may classify a husband-wife owned LLC as a single member LLC but the IRS has stated that a Husband-wife LLC does not qualify as a "Qualified Joint Venture" (QJV) which can elect to NOT be a partnership. The IRS website adds that, "Only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity qualify for the election". Also, see 2009 Small Business Quickfinder Handbook, pages F-6 and B-2.

Does it make any difference who owns more (% wise) of each business (as far as the classification goes?)Husband owns 51% of C Corp and wife owns 51% of LLC.

[OldJack]

>>Does it make any difference who owns more <<

No difference to the corporation unless the C-corp shareholders think the wife is a better risk! Just kidding.