s corp loan

[SunTaxMan]

Shareholder loaned money to corp. Can we write loan agreement for interest to accrue, with only principal being repaid during loan and interest paid at end of loan?

[jainen]

>>only principal being repaid <<

Overlooking the fact that you would be backdating a contract for a transaction that has already occurred, sure. You can make any agreement you want. It's a free country.

However, for tax purposes (and circumstances that require Generally Accepted Accounting Principles) you would have to make an adjustment to the books showing interest allocated to the time period the interest covers. What are you trying to do? The IRS already knows the trick about gifting or otherwise cancelling a debt before it's paid, but maybe someone here can give you another idea.

[SunTaxMan]

"What are trying to do?" We HAD a capital contribution. Now shareholder took distribution 3 times salary taken because I told her she could take money out of business. Now she asks "Why can't we make it a loan, so excess distribution doesn't "attract attention? Just no interest paid yet, so absense of interest income doesn't also "attract attention?"

[jainen]

>>Why can't we make it a loan<<

In my admittedly stodgy opinion, she can't "make" it a loan because it isn't already a loan. It wasn't recorded in the corporate books as a loan, and it wasn't recorded in the corporate minutes as a loan. There never was any agreement to repay it on any kind of schedule; repayment wasn't enforceable at all. Maybe she will return it as needed, but she certainly never agreed to pay for not returning it. She hasn't paid a dime for the use of that money, and she doesn't intend to because she considers it to be her money taken as a capital distribution just like all the documents already say. She just wants to phoney up some new documents to beat the tax system. She even admits that herself!

The only way she can make it a loan is by playing the old childhood vocabulary game about the difference between "can" and "may."

[michaelmars]

if i understand correctly, this will be posted to distributions in 2011. thus its "a short term loan" which if memory serves, can be interest free. the interest anyway should be a wash for an s corp since the corp gets a deduction and the individual gets the income.

[Margaret CPA in OH]

There may be a 'wash' of sorts but the corp still needs to issue Forms 1099-INT and the shareholder/lender still needs to include it on their personal return. It's the principle, too. If one shareholder loaned money but not another, it wouldn't be a 'wash' to the shareholdet that didn't lend.