Whether you're considering putting money into your corporation this year or taking money out, your loans could have tax consequences.

Here are tips to keep in mind before you write those checks.

  • Document your intent. Create a paper trail with an enforceable promissory note and a mention of the transaction in your corporate minutes. Can't be bothered with the paperwork? Think of this: Money you put into — and later take out of — your company that is not considered a "true loan" can be reclassified as wages or dividends, costing you tax dollars.
  • Charge interest. Except for certain small loans that qualify for an exception, the payment of interest is an indication of a true debtor-creditor relationship between your company and you. To avoid the possibility of the IRS calculating the amount of interest you should have paid, you can use the "applicable federal rate," or AFR. The AFR is a minimum interest rate for federal tax purposes that's determined monthly by the Treasury.
  • Make payments. Set up an amortization schedule reflecting the loan maturity, interest rate, and payment due dates shown in your promissory note. Write checks as required on the due dates. If you miss a payment, revise your promissory note. Why? Keeping transactions at arm's length can help prevent loans to and from your company from looking like a dividend distribution or a second class of stock.

While there are pitfalls to be aware of, properly structured shareholder loans can offer planning opportunities. Please call if you would like more information.

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