loan to shareholder

[theresa d]

i'm pretty sure i know the answer to this but a little tired and want to make sure i'm thinking correctly. S corp made a $50000 loan to sole shareholder. set up as a loan with note and shareholder is making monthly payments including interest at 6%. next year the s corp will pick up the interest income. however the shareholder will not be able to deduct the interest expense as used for personal expenses. correct? could the shareholder have set up the loan as a demand note and the afr would only be 3.11% vs 6% in loan agreement? thanks in advance

[Bees Knees]

If the shareholder is using the proceeds of the loan for personal expenses, the shareholder has no deduction for interest paid.

A demand loan could have charged less interest. TTB, page 3-18 says AFRs for December 2005 were running in the mid to high 4% range while demand loans were at 3.11%.