|
I am the only stockholder of a corporation. Instead of drawing an income, can I declare that the corporation loaned me money? |
|
You should pay yourself a salary equal to the amount you would pay an objective third party.The IRS is looking for officers of closely held corporations to pay themselves a "reasonable" salary and have been aggressively examining S-Corps for too small a salary (avoiding payroll taxes by paying distributions) and C-Corps for excessive compensation (reclassifying the payments to dividends). They are also scrutinizing shareholder loans for income and payroll tax avoidance; the risk of penalties and interest are not worth the savings. |
|
There are code sections that spell out when you need to document loans. Generally when the loan is for $10K or more or extends beyond a year you better have a loan document to support the loan. Regardless of whether you have a C Corp or an S Corp, a better way would be to take a reasonable salary and take the remainder of your money either as a dividend or as a distribution of profit. If you don't understand what I'm talking about you NEED professional tax help. With this being said, there is no reason your corporation can't loan you money. There just has to be a legitimate reason for doing so and it has to be documented. Otherwise, you'll be looking for someone like me - who specializes in representing taxpayers who are involved in disputes with the IRS. And the outcome won't be very pleasant. "There is no reason your corporation can't loan you money" - I just want to stress your point that you have to take a reasonable salary first. The question asked about a loan "instead of drawing a salary," which would seem to be tax avoidance. -Tom
(27 Jan '10, 15:18)
Tom
|
|
Another words, what is the "business purpose" why a reasonably prudent individual would want to "borrow" money from a company for employment services? |
|
A corporation can loan money to a shareholder for valid business reasons, but not instead of salary. As others have advised, you must pay a reasonable salary first. If you are taking loans and no salary, there is very high probability that IRS would reclassify the loan as salary. Interest and penalties will make this much more costly than if you did it correctly in the first place. |
|
A worse case scenario - IRS comes in and recognizes the loans as dividends up to the total of the retained earnings. Officer gets to pay income tax, and corporation gets no deduction. A perfect storm!! |
|
Otherwise, you'll be looking for someone like me - who specializes in representing taxpayers who are involved in disputes with the IRS. And the outcome won't be very pleasant. |
