Employer Loan to Employee

[orourkp]

Employer (S-Corp) wants to provide 1-yr term loan to employee (not a shareholder) for $12,000. Loan would be established at arm's legnth and an appropriate interest rate per the IRS Applicable Federal Rate.

I would expect that employer charges employee interest expense, but how is this reported by employer?

With a loan of this or similar size and duration, is there an easier way to structure? I was researching below market loans. If the loan is below $10,000, can this be set up as an interest-free loan with no requirement for employer to report income to employee for the 'foregone interest'? Was not clear to me whether this is individual to individual or could be Corporation (employer) to individual (employee).

[veritas]

The easiest thing is to not loan the money. Often these type of loans go sideways. However if your client insists make sure a proper loan document is prepared. Secure it with property if possible. Have employee authorize employer authority to withold from wages.

[jainen]

Sounds like a good plan

Sounds like a good plan to me. If the corp has cash reserves that would otherwise be sitting in a bank, or even an unused credit line, it makes sense to invest in its own employee. Because of the close relationship, including control of the wages, the corp will have less risk than another lender might.

[orourkp]

The legal documets are ok and include the provisions you mention, except for the security. This is not a secured loan so the company is taking some risk and they are fully aware.

I'm more concerned about the tax ramifications and what options there are to allow a zero-interest loan. I would like to avoid additional tax reporting requirements for a loan that would generate ony $300 in interest over the life. It's more a nuisance factor than anything else.

[veritas]

Investing in an employee is often risky business. I would charge a higher rate because of the risk. You have to ask yourself why doesn't the employee borrow money from a convetional source? I wouldn't worry about the tax implications other than how to write off the amount that doesn't get paid back.

[rosieea]

The legal documets are ok and include the provisions you mention, except for the security. This is not a secured loan so the company is taking some risk and they are fully aware.

I'm more concerned about the tax ramifications and what options there are to allow a zero-interest loan. I would like to avoid additional tax reporting requirements for a loan that would generate ony $300 in interest over the life. It's more a nuisance factor than anything else.

I suggest you review Code Sec 7872. I think it stipulates that employer & employee are related parties and that, therefore, interest must be imputed for below market loans exceeding $10,000. I think that's more of a nuisance than simply charging the interest, and claiming the income on the 1120S.