are shareholder loan repayments taxable
The term shareholder should be taken to mean the shareholder of the corporation or members of the shareholders family. These rules exist to prevent shareholders of private companies from taking out a series of back-to-back loans and avoid personal income tax altogether. One Year Rule – As outlined above, if the loan is repaid by the shareholder within the year after the end of the corporations’ tax year, the loan is not included in income. However, the loan cannot be a series of loans and repayments. When the debt of the S Corporation to the shareholder is paid off in installments, each installment is allocated between return of capital and gain based on the proportion of the shareholder’s basis in the debt to its face amount. Regulation 1.1367-2(a) states that generally, if shareholder advances are not evidenced be separate written instruments for which the principal amount of the aggregate advances does not exceed $25,000 and repayments on the advances, the debt is called open account debt and treated as a single debt. Full or partial cash repayment of the debt by the corporation reduces the shareholder's loan basis. (Repayment with property other than cash is beyond the scope of this item.) If the debt basis has previously been reduced to zero, all the subsequent repayment is treated as taxable income to the shareholder. Editor: Stephen E. Aponte, CPA. A practitioner should take special care in advising clients on shareholder loans to an S corporation. Repayment of the loans by the corporation has the potential to generate unexpected taxable income to the shareholder. First, a quick review of the mechanics of S corporation loans. The final regulations generally are proposed to apply to shareholder advances to S Corporations made on or after October 20, 2008. If the indebtedness is evidenced by a note, the repayment is treated as a sale or exchange. Accordingly, if the note is a capital asset in the shareholder’s hands the excess of the amount repaid over basis is taxed as capital gain. (Rev. Rul. 64-162, 1964-1 C.B. 304). On the other hand, if a current loan account is maintained in the corporation for a shareholder during a tax year and the year-end balance is repaid from salary or declared dividends the CRA will generally not consider these transactions as a series of loans or repayments. 2. Interest expense deduction re shareholder loans. If the proceeds of the shareholder loan were used to produce income from business or property, the amount of interest included as a taxable benefit can be included as part of an interest expense deduction. The Income Tax Act contains a series of rules that may have income tax consequences for the person receiving the loan from the company. In the context of this article, the term loan means any form of debt the shareholder or family member has to the corporation.
Yes