shareholder loan

[oceanlovin'ea]

I have an s corp that had 3 shareholders, mother, father and daughter. Business belongs to mother but put rest of family in as shareholders.

In 2008 daughter loaned s corp some money, $2000.00. Loan has not been repaid yet.

In 2009, daughter told mother to take her off corporation. She didn't like getting K-1 and having to file amended return and pay money to IRS. So in the fall of 2009 mother did this.

So daughter is no longer shareholder and the loan has still not been repaid.

I know that I have to figure interest on the loan, but does the fact that the daughter is no longer a shareholder change the character of the loan?

I have never had this situation before......actually have not had many shareholder loans at all.

So can someone give me some help please.

Linda

[JohnH]

It's still a liability; the only difference is the classification. I'd move it from "loans from shareholders" to "long term liabilities."

[oceanlovin'ea]

Brain started working

Shareholder #1 (mother) is in essence buying her share in the s corp. So she would buy her loan also, wouldn't she?

Now I just have to figure out how to figure how much shareholder #3 (daughter) basis is in the corp on the date they made the change. Saw that somewhere.

#3 will still get a K-1 from the s corp for the part of the year she was a shareholder. Isn't that correct?

Linda

[JohnH]

I think the stock and the loan are two different assets. Selling the stock alone does not affect the loan. Its all depends on how the transaction(s) are structured.

For example, if the mother bought the stock for $3,000, then the mother would own the daughter's stock but the corp would still owe the daughter $2,000 for the loan. On the other hand, if the mother bought the stock for $1,000 and bought the loan for $2,000, then the same amount of money has been paid out but different assets exchanged hands. You just have to keep in mind the economic reality and whether the transaction would pass the laugh test since it's between related parties.

The tax book gives a good explanation on page 19-6 and 19-7 on how to handle the net income of the corp in the year of sale. The easiest method is to allocate the year-end profit/loss to each shareholder using a per share/per day formula. There's another alternative, which involves electing to treat the corp as having two short years. It's more cumbersome and I've never seen it used, although I've heard about people using it when the numbers are very large and/or there are significant differences in income during the year which would unfairly allocate income to the departing shareholder.