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September 30, 2019

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Audit-proof your shareholder loan

June 11, 2018

Your business is a separate legal entity, and if you do not respect that boundary, it can cause problems. The IRS wants you to be separate from your business. One common issue is business owners paying personal expenses out of their business checking account – this is a clear indication that the lines are blurred between what is personal and what is business.

If you're a business owner and your company lends you money, you'll enter it in the books as a shareholder loan. However, if your tax return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend taxable to you as income.

 

Knowing what the IRS might look at may be useful when you structure the arrangement. Here are some items that will be considered if you're audited:

 

  • Your relationship with the business. First, the IRS will look at your relationship to the company. If you're the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you're one of several shareholders and none of the others received similar payments, that suggests it may be a genuine loan.

 

  • Loan details. The IRS will want to know all the details related to your loan. This may include whether or not you signed a formal promissory note, if you pledge any security against the loan and if the loan has a specific maturity date or a repayment schedule. Other questions may come up about the rate of interest you're paying and if you missed any payments. The more businesslike the terms of the loan, the more it will appear to be a genuine debt.

 

  • Other financial details. In addition to loan specifics, the IRS may ask you if your company is paying you a salary that's in line with the work you perform, and if the company pays dividends.

 

Whether the IRS taxes you on the loan will depend on all these factors. If you've paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you'd like more information about getting a loan from your business.

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