C-Corp Interest Accrual

[Acownt4it]

A single shareholder in a C-Corp (accrual basis) has a loan to the business. The details of the loan are:
Loan amount $92,766.61
Annual interest rate 10.000%
Loan period in years 8
Start date of loan 11/30/2001

Corp. has not made regular payments to shareholder due to cash flow issues.
When I accrue the interest expense each year, should I accrue interest based on actual amount still due to shareholder; or on the balance of the loan if regular payments had been made?
I am not why I am struggling on this, but help is always appreciated.

[Roland Slugg]

Financial statements vs tax

Dear Noel

If you're preparing financial statements for this client, you should accrue the interest on the actual amount of outstanding principal for the entire term of the loan. For tax purposes, however, the accrued interest is not deductible until paid (assuming the shareholder/lender is a cash basis taxpayer). Code §267(a)(2)

[Golden Rocket]

Accrue the Interest

Accrue the interest, even though it is not deductible. There should be a liability account called "Accrued interest" and offsetting expense account, "Interest expense."

Nearly all corporations have differences between "book" income and "taxable" income, and it should be incumbent on the tax preparer to know these items. Because some of these are timing issues and can be recovered in later years. For example, if this interest ever gets paid, it will be a deduction for taxable income, but not for "book" income, and this timing differential goes away.

If the terms of the loan are changed, or the loan is replaced with another loan, such that some of this interest is forgiven, the amount in the "accrued interest" liability is reduced accordingly, with a credit offset to the expense account. If the corporation has been unable to repay its owner, then it is very possible (maybe even preferable) that the arrangement be changed.

Appreciate your posts, Acown4it. They are always so intriguing, relevant, and to-the-point.
Thanks for your contributions to our community.