Loan or capital

[Unregistered]

What is better Capital or loan for a client who bought gas station recently.

Client contributed money to corp - what would be good from tax point of view. I understand that he can deduct loss upto his loan basis or capital basis, right?

So loan or capital would not make any difference.

Please help me decide.

Thanks!

[Armando Beaujolais]

What is better Capital or loan for a client who bought gas station recently.

Client contributed money to corp - what would be good from tax point of view. I understand that he can deduct loss upto his loan basis or capital basis, right?

So loan or capital would not make any difference.

Please help me decide.

Thanks!

Not enough information. S corporation? Is the business expecting an initial loss? How many shareholders?

[sea-tax]

What is better Capital or loan for a client who bought gas station recently.

Client contributed money to corp - what would be good from tax point of view. I understand that he can deduct loss upto his loan basis or capital basis, right?

So loan or capital would not make any difference.

Please help me decide.

Thanks!

Like Armondo said not enough info, but here is my 2 cents. I have a few gas stations as clients and one thing I have noticed is that they very rarely turn a net profit in the first couple of years. Also through other observation the owners very rarely will pay back a "loan" . So I typically classify it as a Contribution to Capital. Unless client presents a promissary note from him/her to the Corporation, with stated interest and all that good stuff.
Ur if you give the guys and gals her more info I bet you will get more good info back. Good Luck

[Unregistered]

Not enough information. S corporation? Is the business expecting an initial loss? How many shareholders?

Scorp.
Three Shareholders.
All equal.

Two shareholders contributed their own money. While third one took home equity loan and then contributed his amount.

Business is expecting loss in first year

Please let me know if you need more info.

Thank you for your input.

[S T]

All Clients

Seems like if the Client is willing to listen, we can feed them a multitude of do's and don'ts. Key is "Will the Client Ask Questions before they do something, and then listen to the response".

Really hard to correct once the client has already taken an action and asked about it after the fact. I am working with a C Corp and an S Corp right now, that seemed to have received some very bad advice in the way that loans and money were moved around!

Sandy

[sea-tax]

Scorp.
Three Shareholders.
All equal.

Two shareholders contributed their own money. While third one took home equity loan and then contributed his amount.

Business is expecting loss in first year

Please let me know if you need more info.

Thank you for your input.

I am by no means the resident expert on Corporations, but I still think without a promissory note , you have Contribution to Capital. In my opinion the fact that the 3rd shareholder took out a home equity loan to get his capital is of no importance to the corp. It would be treated the same way as the other two shareholders. Contribution to Capital for all three.
Anyone else agree or disagree?

[Armando Beaujolais]

Check out TTB page 19-4. It talks about the "One Class of Stock Rule." All shares need to have identical rights to distributions or S corp status is disqualified. If one shareholder puts in money and expects to take money out without identical distributions to the other shareholders, it needs to be a loan.

Agree that it doesn't matter where the shareholder got the money. You say they're all equal shareholders. Does that mean they all contributed the same amount of money for the same amount of stock? If that's the case, I don't know why you're even talking about booking it as a loan. It's a capital contribution, pure and simple. No matter what happens, you're going to involve the other two shareholders. You can't just isolate one shareholder and treat transactions differently.

[OldJack]

Like everyone has said... not enough information to make an intelligent decision. The amount of money being invested has a lot to do with this decision and the intent of the shareholders to want their money back.

1) It would appear that the 3 shareholders are contributing a good size amount of money for each shareholder. At least one of those had to borrow money and would like it back as soon as the corp can afford to return it to him. Thus, that shareholder needs it classified as a loan.

2) If each shareholder has say $500 as their contribution for say 500 shares the ownership is equal so what is wrong with the balance of any additional contributions being treated as a loan documented with a promissory note and interest written on toilet paper.

3) The decision on how much is paid for stock and the balance a loan has mostly to do with what the corp balance sheet needs to show in order to satisfy a loan company. The amount of dollars for a S-corp capital stock is not an issue with the IRS.