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Author: MattCulbreth Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121316  
Subject: How can my company make a loan to me? Date: 3/9/1999 2:35 PM
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Hello,

I started a consulting business last year. I incorported, took in $4000 in income, and paid out $3400 to myself, the sole stockholder. The $3400 I paid out was going to be a distribution under an S-Corp, but I didn't get the papers in on time. That means my corporation was a C-corp for last year.

I'd obviously like to handle that $3400 in the smoothest way possible. I don't want to treat is as payment to myself in a 1099 relationship because I'll owe payroll taxes on it. I don't want to treat it as a dividend because then it will be double taxed.

So, can I treat it as a loan to myself? What are the steps needed to do this?

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Author: UUinMN Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11836 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/10/1999 10:59 AM
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Hi, Matt.

This is not professional opinion, so take with a grain of salt. OTOH, I am also a consultant, and own a C-corp, of which I'm the only employee. (I chose C on purpose, for other reasons, so I don't have direct experience with S-corp distributions.)

Yes, you can loan money back and forth between yourself and your corporation. I've done this--mostly from me to the corporation, when it was new. I didn't bother with loan documents (why sign a page as both creditor and borrower?), but I did mark the checks, and set up a separate account in QuickBooks to track it. And I did pay the loans off. I think this is a sufficient paper trail to make it clear that they were loans.

However, this probably won't help you with your situation. Your corporation would have to report Loan to Owner of $3400 as an asset, and would show a profit. And owe taxes.

Aside from that, you have to be somewhat careful about S-corp distributions. Since the corporation generated income by employing you as a consultant, it has to pay you a "reasonable" salary. What's reasonable? Something similar to what you would have been paid by some other corporation to do a similar amount of work. I don't know how much that is, but you should have an idea. If you don't pay a reasonable salary, the IRS can reclassify the distribution, or part of it, as salary.

If you made a $3400 salary payment in 1998, and didn't withhold Federal and State taxes, and FICA and Medicare, you're late now, and owe penalties. Then there's Federal and State Unemployment, too. Ouch.

When I set up my corporation, I had a CPA take me through all the filings. It wasn't cheap, but I've got a handle on it now. Fortunately, there are tax benefits, too.

Good luck.

Michael



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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11907 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/10/1999 10:42 PM
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I started a consulting business last year. I incorported,
took in $4000 in income, and paid out $3400 to myself,
the sole stockholder. The $3400 I paid out was going to be
a distribution under an S-Corp, but I didn't get the papers
in on time. That means my corporation was a C-corp for
last year.

I'd obviously like to handle that $3400 in the smoothest
way possible. I don't want to treat is as payment to myself
in a 1099 relationship because I'll owe payroll taxes on it. I
don't want to treat it as a dividend because then it will be
double taxed.



Sounds like wages to me. Your corporation has to file and pay quarterly state and federal tax payments and state and federal Corporate income tax (Federal From 1120, by March 15th). Better see a CPA to discuss your obligations and the Sub S rules.

Your payroll tax reports for the 1st qt 1999 are Due in mid April.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11966 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/11/1999 3:20 AM
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[[I started a consulting business last year. I incorported, took in $4000 in income,
and paid out $3400 to myself, the sole stockholder. The $3400 I paid out was
going to be a distribution under an S-Corp, but I didn't get the papers in on time.
That means my corporation was a C-corp for last year.

I'd obviously like to handle that $3400 in the smoothest way possible. I don't
want to treat is as payment to myself in a 1099 relationship because I'll owe
payroll taxes on it. I don't want to treat it as a dividend because then it will be
double taxed.

So, can I treat it as a loan to myself?]]

Sure...as long as it's not disguised compensation. But that's a call that YOU will have to make.

[[ What are the steps needed to do this? ]]

A valid note...signed by both you and the corporation president or CEO (which is one in the same person...but still follow the form) and a reasonable rate of interest...which must be paid to the corporation...and which may not be deductible by you.

And you WILL have to repay the loan eventually.

Hope this helps...
TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12158 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/14/1999 10:19 PM
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[[I started a consulting business last year. I incorported,
took in $4000 in income, and paid out $3400 to myself,
the sole stockholder. The $3400 I paid out was going to be
a distribution under an S-Corp, but I didn't get the papers
in on time. That means my corporation was a C-corp for
last year.

I'd obviously like to handle that $3400 in the smoothest
way possible. I don't want to treat is as payment to myself
in a 1099 relationship because I'll owe payroll taxes on it. I
don't want to treat it as a dividend because then it will be
double taxed.


Sounds like wages to me. Your corporation has to file and pay quarterly state
and federal tax payments and state and federal Corporate income tax (Federal
From 1120, by March 15th). Better see a CPA to discuss your obligations and
the Sub S rules.]]

I would respectfully disagree. I believe, if done correctly, that the distribution could be classified as a loan. But I DO agree that a qualified tax pro might be in order with respect to any corporation transactions.

TMF Taxes
Roy

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Author: czako Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12358 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/16/1999 7:12 PM
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If you're even considering doing a forgivable loan, don't do it. I checked with the IRS, and you're not allowed to do a forgivable loan with a "related party" - I don't have the exact terminology in front of me, sorry.

If you weren't considering it, or don't even know about a forgivable loan, just ignore the post, ok?



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12507 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/18/1999 9:38 PM
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[[If you're even considering doing a forgivable loan, don't do it. I checked with the
IRS, and you're not allowed to do a forgivable loan with a "related party" - I
don't have the exact terminology in front of me, sorry. ]]

If done correctly, a loan between related parties is valid and legal. Don't let Uncle Sammy scare you out of them. But the point is "done correctly".

But if not done correctly, then you really DO want to stay away from them.

TMF Taxes
Roy

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Author: czako Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12537 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/19/1999 11:24 AM
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Here's the response I got from the IRS. My question was:

Can I loan money to my corporation and then forgive the loan as tax relief to myself?

Answer:
if a lender loans money to a person or corporation, then the lender is entitled to write
off, or forgive the loan. this loan, or bad debt would be deductable in some format by
the lender.

however, the borrower would have income from the discharge of indebtedness.

if you loaned money to this corporation, and then forgave the debt, it is doubtful that
you would be entitled to deduct any bad debt from this. this is because it is a related entity.



Still, I'd recommend checking for yourself.




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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12668 of 121316
Subject: Re: How can my company make a loan to me? Date: 3/22/1999 12:06 AM
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[[Here's the response I got from the IRS. My question was:

Can I loan money to my corporation and then forgive the loan as tax relief to
myself?]]

But the original post had, as I recall, NOTHING to do with "forgiving" the initial loan. If you FORGIVE the loan, then I would agree with the IRS. But if you later convert the loan to W-2 income, or repay the loan, or convert the loan to additional capital, then the loan would certainly be valid.

TMF Taxes
Roy

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