C Corp shareholder loans $s to corp

[ACS41]

New client (C corp shareholder)made about $95K in loans to corporation over the 8 years of existence. No note, no interest expense, no repayments ever made to shareholders. Company has only had one profitable year and is carrying a NOL. This year will be a big loss funded in part by additional shareholder loan. Capital stock is $1K. It is not likely these loans will be paid back anytime soon based on my review of operations and the past tax returns! Should interest be accrued (and a 1099-Div) issued, convert the loan to stock, or let it be? The client is not keen on a 1099-Div when they are losing their shirt. Also, the sharholder who provides sweat labor does take reasonable salary. My opinion is to have the shareholders convert the loans to equity.

[OldJack]

Shareholder loans to a C-corp in excess of $10,000 are required to pay/impute interest at the minimum of the federal published rate applicable to the terms of the loan with a 1099-INT issued. Loans can get paid back tax free, but it is not easy to redeem shares of stock if the company becomes successful as redemption is usually with a taxable gain or taxable dividend to the shareholder thereby creating the double tax. Capitalization and issue of stock is a tough call that must be left up to the shareholder.

[ACS41]

Shareholder loans to a C-corp in excess of $10,000 are required to pay/impute interest at the minimum of the federal published rate applicable to the terms of the loan with a 1099-INT issued. Loans can get paid back tax free, but it is not easy to redeem shares of stock if the company becomes successful as redemption is usually with a taxable gain or taxable dividend to the shareholder thereby creating the double tax. Capitalization and issue of stock is a tough call that must be left up to the shareholder.

Thank you. I'll be speaking with the client today.