Shareholder Loan

[Bart]

I have a shareholder that wants to borrow money from his C corp. What is the maximum repayment term? Can he make interest only payments?

[OldJack]

Yes.. A shareholder in a C-corp can certainly borrow money from a 100% owned corporation. There are, of course, dangers in doing so unless the loan is properly documented and treated in an arms-length type transaction. Note that when the corporation files its 1120 tax return it must report such loans on a separate line of the balance sheet on page 4. Thus, the loan is called to the attention of the IRS which will then look to see if the corporation has reported interest income on page 1.

The loan should have proper documents reflecting proper terms and interest and due date or payment plan. Interest rate should be the current market rate at the date of the loan or at least the quarterly IRS published applicable federal rate.

The greatest danger is that the IRS will reclassify the loan as a taxable dividend to the shareholder and thus no tax deduction for the corporation. This is usually when proper documents are not a matter of record and the shareholder has made no payments to reduce the loan. Interest paid by the shareholder may or may not be a 1040 tax deduction depending upon the facts of how the loan is treated. It is possible for a short-term loan to only pay interest without principal if the due date of the note is less than 12 months. There are other concerns that you should do a little research on before advising your client.