S Corp Loan Question

[Unregistered]

Are S corporation shareholder loans treated just like capital contributions for the shareholder’s basis for gains and losses? I heard there’s no difference between direct loans and capital contributions. I just wanted to verify.

[Gretel]

Not quite true

For being able to take losses on the 1040 it's true; a direct loan increases basis.

But basis in regards to distributions includes stock basis only. So if you make distributions you need to make sure it's either not below stock basis or it's used to pay back shareholder's loan.

[taxmandan]

Shareholder loans

Are S corporation shareholder loans treated just like capital contributions for the shareholder’s basis for gains and losses? I heard there’s no difference between direct loans and capital contributions. I just wanted to verify.

Yes, as long as they have a properly signed loan document specifying repayment terms, etc. Be sure they understand the issue if they claim losses against their basis in the loan and then the loan is repaid.

[Armando Beaujolais]

No, that’s not correct.

It’s true that a loan must be a direct loan from the shareholder to an S corporation to increase loan basis, but loans are not treated the same as capital contributions or other basis adjustments.

Stock basis and loan basis are two separate things and are tracked and adjusted in different ways. You cannot apply loan basis to make distributions nontaxable. Distributions are considered first in ordering rules. Distributions cannot reduce stock basis below zero no matter how much loan basis you have. If a distribution is in excess of stock basis, the difference is a gain without regard for loan basis. Loan basis only applies when losses and deductions (not distributions) adjust stock basis to zero. Then, once you tap into loan basis, you have to restore loan basis with future increases.

Gabrielle is correct. You want to structure distributions as loan repayments rather than S corporation distributions.