7-8 years ago very profitable proprietorship formed an S-corp for protection of personal assets.
At the formation of the corporation he had $300,000 in receivables which I wrongly assumed was going to be collapsible (collected and given to him). To take advantage of this I recommended that he start out with only $10,000 in capital stock (his own money), and to simply "lend" the corporation the $300,000 in receivables and then pay himself the loan back to avoid dividend treatment. [p.s. don't be derailed by "dividend treatment" for an S-corp -- it does have a significant effect because TN taxes dividends whether Federal does or not]
Bad strategy. The $300,000 was collected and never paid back to the owner. Owner can live comfortably on salary and never invades the corporation for anything else. Now some 7-8 years later, the corporation has this huge loan to the shareholder for some $300K. I am fearing IRS could recharacterize this loan as original capital.
Any suggestions as to how we can get out of this situation? Owner is not interested in taking the money.
At the formation of the corporation he had $300,000 in receivables which I wrongly assumed was going to be collapsible (collected and given to him). To take advantage of this I recommended that he start out with only $10,000 in capital stock (his own money), and to simply "lend" the corporation the $300,000 in receivables and then pay himself the loan back to avoid dividend treatment. [p.s. don't be derailed by "dividend treatment" for an S-corp -- it does have a significant effect because TN taxes dividends whether Federal does or not]
Bad strategy. The $300,000 was collected and never paid back to the owner. Owner can live comfortably on salary and never invades the corporation for anything else. Now some 7-8 years later, the corporation has this huge loan to the shareholder for some $300K. I am fearing IRS could recharacterize this loan as original capital.
Any suggestions as to how we can get out of this situation? Owner is not interested in taking the money.
Comment