How Do I Treat Loans To/From Corporation?

You are permitted to take loans from your corporation. However, if the outstanding balance exceeds $10,000 at ANY time during the year, you are required to pay your corporation interest on the loan, at the applicable Federal rate.

If the interest is not paid by year end, the IRS has taken the position that it is deemed to have been paid by the corporation declaring you a dividend in the required amount, and you returned the money to them as interest. For a regular corporation, that would mean you would have income from dividends, but possibly not an offsetting deduction for interest, depending on what you used the loan proceeds for. The corporation would have no deduction for the dividend given to you, but would have to recognize the interest income "paid" with those dividends. As you can see, the concept means you may both have to pay tax on income that neither of you really received! This is the reason why the interest should be kept current on shareholder loans, where it is required.

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