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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2940
Experience:  IRS licensed Enrolled Agent and tax instructor
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Hypothetically, if over years, a business owner takes multiple

Customer Question

Hypothetically, if over years, a business owner takes multiple loans from the company in the form of $5000 checks cashed. All kept on the books as loans to the stockholder and reported on the corporate taxes. The owner cashed the checks and finds he now has $80000 in cash that he would like to pay back to the company. Thereby repaying the loan. Any cash retained was reported on corporate taxes and individual taxes as Income with appropriate taxes paid.
How can the large amount be deposited in cash back to the corporation without incurring the wrath of the government. All checks written to the owner were written and recorded as loans to the stockholder. Held as cash as a hedge against any possible business failure or other circumstance. The business does over 2 million a year in gross income and is now financially stable.
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.
Hi. My name is ***** ***** I will be happy to help you.
Repayment of the loan's principle (the original amount borrowed) doesn't create any taxable event. However the interest will become taxable income to the corporation. Assuming interest of 3%, the repayment of 80K will generate income of $2400 which is a drop in the bucked for a 2M business.
Here's what IRS says about corporate loans to shareholders:
"A loan by a corporation to a corporate officer should include the characteristics of a loan made at arm's length. That is, there should be a contract with a stated interest rate, a specified length of time for repayment, and a consequence for failure to repay the loan. Collateral would also be an indication of a loan. A below-market loan is a loan which provides for no interest or interest at a rate below the federal rate that applies. If a corporation issues you, as a shareholder or an employee, a below-market loan, the lender's payment to the borrower is treated as a gift, dividend, contribution to capital, payment of wages, or other payment, depending on the substance of the transaction."
If those draws were rely loans with proper paperwork to back it up, you can repay the entire loan without any tax consequences. There are no limits on repayment of the loan.
Let me know if you have any question.
Expert:  emc011075 replied 1 year ago.
What kind of business structure are we talking here? Since you mentioned retained cash I assumed it is a regular corporation.
Expert:  emc011075 replied 1 year ago.
I see you read my respond. Do you have any questions? Is there anything else I can help you with today?
And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.
Customer: replied 1 year ago.
My concern is depositing that large a volume of cash. Even though three is an ongoing record of cashed checks does the deposit back into the company (sub S) violate banking laws and is the IRS GOING TO SHOW U AND CONFISCATE THE FUNDS
Expert:  emc011075 replied 1 year ago.
IRS don't confiscate funds for no reason and not without a levy (court order). IRS is not concerned about deposits, IRS is concerned about unreported income. If you get audited ALL of your deposits will be questioned/verified regardless how big or how small the deposit it.
The bank might ask you about the source of the money and it most likely be reported to IRS but it is a standard reporting procedure all banks has to follow. Making deposit into your or company bank account is not automatically considered taxable income. It is just like any other deposit.
Expert:  emc011075 replied 1 year ago.
IRS and banks will be more suspicious about several small deposits just bellow the reporting threshold (that could indicate that you are trying to hide something) than about a one large deposit that you can easily explain. If you want to make a large deposit you are better off just make one as oppose to several small ones just to avoid the routine reporting.