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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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Can a stockholder waive the interest payments due on a stockholder

Resolved Question:

Can a stockholder waive the interest payments due on a stockholder loan to their corporation, if the corporation has negative Retained Earnings and little to no income in the current year, without risking the IRS classify the loan as a below market loan or worse have the IRS reclassify the loan as equity?
Submitted: 2 years ago.
Category: Tax
Expert:  jgordosea replied 2 years ago.

Greetings,

 

That may depend on the particulars in the loan agreement (and even how well is the loan documented). Waiving the interest, or better deferring until later the payment, is not by itself determinative and would have to be considered with other factors as would any determination the loan was really equity.

 

The charging and actual payment of interest is one important factor in determining if it is an actual loan and not a capital contribution.

Other factors to consider are if it were a lender other than the shareholder would the actions be consistent with a prudent investor.

 

As mentioned, documentation of the loan can be indicative and any delay or deferral that is not in the original loan agreement should be documented by amending that agreement or making a new agreement for the interest deferral.

 

One solution might be to treat the interest for this year as transferred to and then back as a capital contribution of the shareholder. Although the interest would not be deducted by the company (but is a nondeductible expense for tax purposes) and not declared as income by the shareholder satisfying the interest with an additional paid in capital for the interest amount might be preferable to simply delaying the payment and making the total due to shareholder increase. Of course any solution needs to consider all of the facts and circumstances which your tax practitioner can assist to consider.

 

The one time delay of the interest payment (especially if there is a history or payments) has to be taken along with all of the other factors in whether this is an actual loan. Proper documentation can help demonstrate the intent of the parties.

 

Please ask if you need clarification or more discussion.

Thank you.

 

 

 

 

 

 

 

 

 

 

 

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Customer: replied 2 years ago.

Thank you for the additional info. it helped to solidify my position with the stockholder along with all of the other reserach findings I had. I did want to verify the no interest charge was on shareholder loans under $10,000 or $25,000? I thought we had to charge interest on loans from stockholders over $10,000 but the open/debt credit limit was $25,000.

Expert:  jgordosea replied 2 years ago.

Hello again,

.

Under Regulations 1.1367-2 and 1.1367-3. open account loans to an S corporation by any shareholder are treated as separate notes if the account balance due to a shareholder exceeds $25,000 at the close of the S corporation's tax year.

This means open accounts of less than $25,000 are not treated as notes.

.

The rules of IRC section 7872 do not apply to any corporation shareholder loan when the aggregate amount of loans (below and at or above market rates) outstanding between the lender and the borrower does not exceed $10,000. This applies to shareholder loans both to the corporation and from the corporation.

.

For complete information see the Market Specialization Segment for Shareholder Loans at http://www.unclefed.com/SurviveIRS/MSSP/a8shloan.pdf

.

Interest on all loans above the $10,000 de minimis amount, even those above the Applicable Federal Rate, should have interest paid or accrued to avoid imputing interest.

That is one reason it was earlier suggested to accrue and convert to additional paid in capital any interest required by the loan agreement not paid at the end of each year.

.

Any imputed interest due to not being paid or accrued may only be deducted by the corporation and claimed by the individual as income in the year actually paid for a loan to the corporation.

.

The correct minimum amount is 10,000 for loans from shareholders.

.

Please ask if you need clarification or more discussion.

Thank you.

.

.

.

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Please remember when you are asked to rate my service that you are rating me, personally, for the service and information that I have provided. A positive rating is the only way that I receive credit for my time and effort to assist you.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience: I've prepared all types of taxes since 1987.
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jgordosea
jgordosea
Enrolled Agent
2840 Satisfied Customers
I've prepared all types of taxes since 1987.