Correcting Shareholder Loan to Corp that was never put on books or balance sheet

[gmdoane]

I have a corporation that during 2000 through 2002 suffered losses (1120 showed NOLs.) During those years the main shareholder loaned the corporation money - over the three year period about $500,000. Although a promissary not is not a problem, there is no book or tax return documentation that shows the loan. The corporation is stable now and the shareholder would like to start getting paid back. Is there any way to correct this without getting flagged for an audit? We're afraid the repayment would be looked at as a shareholder distribution disguised as a loan repayment.

[Roland Slugg]

I'm curious: If the loan was not recorded on the corp's books, how did the cash get accounted for? It sounds like the s/h made a series of loans to the corp, and if that cash was deposited in the corp's bank account, then the "credit" side of the transaction(s) must have been recorded somewhere on the corp's books.

In addition to getting that straightened out, your client ... i.e. the corp ... should do the following: (1) Prepare and give the lender a promissory note for each advance/loan. One note may suffice if it refers to additional advances; and (2) document the loan(s) in the corporate minutes.

The loans/advances should bear FMV interest, which can vary over time as interest rates change, and there should be a fixed repayment date, or at least a date when principal payments should begin. The latter can be amended if conditions change, but any changes should also be properly documented.

[BOB W]

There is a lot that doesn't smell right. Can you get proof of these loans. Cancelled checks from shareholder's personal account(s). Or at least some proof as to where the money came from. Chances are he will say "it was cash".

Nobody's books could of made such an error, unless the deposits were recorded as sales.

[mactoolsix]

I have a corporation that during 2000 through 2002 suffered losses (1120 showed NOLs.) During those years the main shareholder loaned the corporation money - over the three year period about $500,000. Although a promissory not is not a problem, there is no book or tax return documentation that shows the loan. The corporation is stable now and the shareholder would like to start getting paid back. Is there any way to correct this without getting flagged for an audit? We're afraid the repayment would be looked at as a shareholder distribution disguised as a loan repayment.

Is this the same C-corp you posted about changing to an S-corp? If so, sounds like there could be some NOL?

[gmdoane]

Correcting Shareholder Loan

Is this the same C-corp you posted about changing to an S-corp? If so, sounds like there could be some NOL?

Yes, it is the same C-corp and there were NOLs that have all been used up now.

[gmdoane]

Correcting Shareholder Loans

I'm curious: If the loan was not recorded on the corp's books, how did the cash get accounted for? It sounds like the s/h made a series of loans to the corp, and if that cash was deposited in the corp's bank account, then the "credit" side of the transaction(s) must have been recorded somewhere on the corp's books.

In addition to getting that straightened out, your client ... i.e. the corp ... should do the following: (1) Prepare and give the lender a promissory note for each advance/loan. One note may suffice if it refers to additional advances; and (2) document the loan(s) in the corporate minutes.

The loans/advances should bear FMV interest, which can vary over time as interest rates change, and there should be a fixed repayment date, or at least a date when principal payments should begin. The latter can be amended if conditions change, but any changes should also be properly documented.

The loans were originally recorded but the "payback" was incorrectly reported. The accounting agency at the time should have made a second adjusting entry but did not. It is from a financial agency that gets paid through pass through payments to the advisors.

[gmdoane]

Correcting Shareholder Loans

There is a lot that doesn't smell right. Can you get proof of these loans. Cancelled checks from shareholder's personal account(s). Or at least some proof as to where the money came from. Chances are he will say "it was cash".

Nobody's books could of made such an error, unless the deposits were recorded as sales.

There is proof through personal accounts of the shareholder. Unfortunately, it's completely legit.

[Burke]

Without supporting, contemporaneous documents, you know what the IRS is going to do. And no interest or principal was ever paid to the shareholder? Drafting up loan documents 13 years down the road is kind of pushing it, but I guess he can take his chances.

[buzzardbreath]

Too many twists

The loans were originally recorded but the "payback" was incorrectly reported. The accounting agency at the time should have made a second adjusting entry but did not. It is from a financial agency that gets paid through pass through payments to the advisors.

Mz Doane, with all due respect, your presentation of this situation is chasing us around the plate. You say the loans are legit, but there is no evidence - our guess is that the shareholder is claiming they are legit and you are accepting that to be the truth. Now the loan is from a financial institution? Has the shareholder simply guaranteed this loan and claiming he himself has loaned the money?

For any loan to materialize on a balance sheet in the past, present, or future, there HAS to be a "where it come from, where it went" and this is not being communicated to us. If it is not being communicated to you from the client, then you will never get this straightened out.

Is there a problem with the cash trail, for example, shareholder directly paying for equipment (and giving rise to the "loan") that the corporation should have paid for?

[taxxcpa]

If the company had any kind of double-entry books, the cash received would have been debited to "Cash" and there would have to be a credit to something. If Notes Payable or Loans Payable were not credited, then the way to correct it would be to debit whatever account was originally credited and credit Loans Payable to Shareholder.

If you can't find the entries that were made when the funds were deposited, you won't have any way to know how to correct it. An educated guess would be about the best you could do.

[BOB W]

If this was my client I would tell him" There is nothing I can do about it because there are no supporting records showing it was deposited in the business".

It is possible the money was used for personal living expense while the Corp was loosing money during those years.

[Uncle Sam]

Could the credit amounts have been erroneously posted to Additional Paid In Capital?

[JON]

How were NOLs created

if it was by cash - then cah was debited before expenses were paid and what was credited??? NOLs mean liabilites were in excess of asessts each year or assets declined eacg year rthat happened. Also equity could increase because of additional amounts put in to create the NOLs which would offset each other. If the stockholder loaned cash to the corporation or paid expenses directly for the corporation he would have already, we hope, received credit for those.

[gmdoane]

Correcting Shareholder Loan

I agree with all of the above and understand what it looks like. This is not a financial institution - it is a financial services group. The securities brokerage firm that is gone through, years ago when the firm signed on with them, gave a loan to the firm. Part of the loan is forgiven every year as long as conditions are met and a 1099 was given to the shareholder each year for the forgiven portion of the loan.
The advisors (and the single member shareholder) are paid a salary (not commission) by the firm because the accounts are worked on as a team. The brokerage firm pays the advisors directly (because they have to have an advisor assigned to each account) and 1099's them which they turn the payments over to the firm (and 1099 the firm). The original shareholder loan was on the books and the accounting company at the time had been paying the shareholder loan down rather than adjusting the brokerage loan.
The accounting company assigned this account to several people over the years because of high turnover. Someone dropped the ball but it's been difficult to determine where or when it was dropped. This is a good family business and the shareholder doesn't want to play games with the IRS and is willing to let it drop. I'm just interested in how this could legitimately get corrected.