Loans from Shareholders

[Corduroy Frog]

Three days before the end of the fiscal year for a C Corp, the owner/shareholder advanced himself $50,000 for non-business purposes.

"Shop talk" when accountants get together is that reporting a "Loan To Shareholder" on the balance sheet throws up a red flag when it exceeds $10,000. Of course, you won't find this in any official government publications. Provoking an audit, of course, means the $50,000 can be recharacterized as dividends.

Worse still, he can't pay the money back to the corporation after the fiscal year closes and get rid of it on the balance sheet. (Or can he?)

I would invite some of you, who have perhaps had experience with this issue, to comment.

[BHoffman]

Note that this article is dated 2006, so some or all of the information might be outdated - especially in regards to the preferred tax treatment of dividends. But it might shed some light on your subject, and I think IRC 7872 might be the issue. I think the $10k number mentioned in shop-talk might have more to do with S-Corps.

http://www.nysscpa.org/cpajournal/2006/106/essentials/p28.htm

IMO: We report the news, we do not make the news. If the shareholder took a loan from his corporation, then it should be reported as such. The damage control would be to advise him to ask that his attorney draw up a promissory note.

I've seen where other accountants will simply re-name the account from "Loan to Shareholder" to "Short term investment" or a bland "Note Receivable" or something hokey like that to try and cover up the fact. That seemed dumb because the only way this would be an issue is under audit, and the fact that it was a loan to shareholder would certainly come out then.

It isn't "illegal" for a corporation to make a loan to a shareholder, but the proper recording of repayment can be tricky.

[Davc]

I've seen where other accountants will simply re-name the account from "Loan to Shareholder" to "Short term investment" or a bland "Note Receivable" or something hokey like that to try and cover up the fact. That seemed dumb because the only way this would be an issue is under audit, and the fact that it was a loan to shareholder would certainly come out then.

Saw an 1120 doen by a local CPA where the loan to shareholder was labeled "Misc Receivables".

[Snaggletooth]

Loans to Shareholders

I plan to show the $50,000 withdrawal as "Loans to Shareholders." There have been examples of other accountants classifying it as something other than this. If there is support for classification on some other line, I would like to hear it.

Does anyone have experience on what happens to "Loans to Shareholders" if this line exceeds $10,000 and whether or not this is really a red flag to auditors? This was the original question (perhaps poorly stated), as much as the other comments have been appreciated.

[Gretel]

As far as I know the $10,000 limit is for an interest free loan, IRS does not care about interest up to this amount. Beyond $10,000 it needs to be an arm length transaction to not run into any issues.