S-Corp Officer adavnce

[LBR]

When an Officer of an S-Corp takes an advance where would it be listed on the 1120S? It has never been paid back. Thanks

[JohnH]

It's an asset on the balance sheet until repaid. But he may as well have counted it as a distribution from earnings in the year in which it was taken. Since it isn't a deductible expense, it wound up in his income in the year it was taken a anyhow.

[Nashville]

$10,000 thresshold

I haven't seen this in codes or regs, maybe it came out of an old IRS audit manual.

There is a perceived problem in reporting an advance to officer greater than $10,000. Especially one that never
gets paid back. Again, never seen a cite on it, but almost every old-time CPA is aware of it.

[Roland Slugg]

The OP doesn't say if the advance was $1,000 six months ago or $25,000 five years ago. It also doesn't say if the advance was made to a shareholder.

If it was truly an advance ... i.e. a loan ... it should be repaid, with interest. (The interest could probably be waived if the amount of the loan was small and the time until repaid was short.) If it was not a loan, then it was either compensation or it was a distribution ... a dividend. If the officer is not also a shareholder, it can't be a distribution.

Loans to officers, and especially shareholders, should be documented ... preferably with a promissory note ... and should be repaid according to their terms. Loans that are never repaid run the serious risk of being recharacterized by the IRS as either compensation or dividends, and the more likely of these is probably compensation, yielding payroll taxes, late penalties and interest.

In order to reduce this possibility, I would urge you to discuss this with the client and persuade him to repay the "advance" ASAP, plus reasonable interest.

[JohnH]

I had assumed "shareholder", but you're right in that it only says "officer". We also don't know if there are other shareholders. But I've often wondered why a 100% shareholder would bother to book a loan in an S-corp. It isn't a deductible expense of the corp, so it winds up in his income anyhow (except in highly unusual circumstances). May as well clear the books at year-end. Besides, if he actually draws up a note and pays interest on it, he must report the interest income on the K-1 but he doesn't get a tax deduction for the payment on his 1040.