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In order to qualify for the bad debt deduction, this shareholder loan had to be documented with a formal note at a fair interest rate
If there is no formal note agreement, the IRS will rule that the advances were capital infusions rather than bona fide loans.
A recent court decision in October 2012 dealt with this very issue.
The note should also be documented in the formal corporate minutes.
If this is not authorized in the meeting minutes and is not formally documented by a note agreement, then the bad debt deduction will be disallowed.
See the following article: http://www.schneiderdowns.com/bad-debt-deduction-for-shareholder-loan-to-corporation
Do you have any further questions? If properly documented, you would take a schedule d capital loss until fully deducted
If no further questions, please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today
OK - At this point (still in 2013) can my attorney and I now create a note agreement covering the shareholder loan and include it in the corporate meeting minutes to permit me to begin deducting the shareholder loan as a bad debt for future deductions against my personal income tax?
No, this had to be done at the time the loan was given to the corporation
before the funds were dispersed
Is there anything else that I can assist you with today?
No - it's just disappointing.
I'm truly sorry that I don't have more favorable news.
I do have a further question related to my previous question. In addition to the current shareholder loan which I understand I cannot claim as a bad debt, I maintain a separate line of credit associated the business with a commercial bank. I want to pay off this line of credit from my personal funds (a shareholder loan). Based on what you advised me, provided that I have a loan agreement created PRIOR to my transferring the the funds AND I have that loan agreement officially entered into my corporate minutes book then I should be able to deduct that amount as a bad debt on my personal income tax (@$3000/yr). Is that correct?
In follow up to our communications last month I want to confirm that the actions I have taken will allow a bed debt deduction:
Consistent with your previous input and the informational link you provided
a non-negotiable promissory note has been created by my attorney confirming the loan I will make to the corporation. This note includes a fixed schedule for repayment, a maturity date, an interest rate, and a demand for repayment. No collateral is obtained or requested. I have not yet made the loan to the corporation nor, obviously have I made any repayments.
A Unanimous Written Consent of the Board of Directors for my company (that's me) has been created confirming that the company will cease operations. Both the Promissory Note and the UWC will be entered into the corporate minutes.
The company is still in business - but again it is my intention to close the company officially on 12/31/13.
To review, the company has an outstanding loan to a bank which I want the company to pay off using the proceeds from execution of the Promissory Note. The indebtedness will then be from the company to me (the lender) rather than the bank.
What do I now need to do to assure that I am in conformance with the factors outlined in the referenced article?
Does the company need to make a single repayment to me prior to 12/31/13 to demonstrate that a repayment has been made?
What may need to be demonstrated relative to item 8 noted in the reference article? Based on what you know is there an issue with respect to the "valid debtor-creditor relationship?"
Should the Promissory Note should be dated PRIOR to the UWC?
So, here's what I plan to do unless you counsel me otherwise:
(1) Within the next week execute the Promissory Note and UWC for inclusion in the Minutes Book.
(2) Deposit the note amount in the company's account - and have the company pay off the bank loan.
(3) Have the company then make a single repayment to me on 11/1/13.
(4) Make a final tax filing for the company in 2014 for tax year 2013. This tax filing will indicate that the company has insufficient funding to repay the loan and a notification will be made to the lender. The loan can then be categorized as a bad debt - which can then be accounted for as such on my personal tax return.
Please review and advise - thanks.
I appreciate your positive response. If I am interpreting you correctly, therefore, then provided I do all the steps which I outlined in my previous note that the valid debtor/creditor relationship should not be a "red flag" - and that I should not anticipate that there will an issue with substantiating the bed debt deduction.
Do you concur?