Alright, I own a S corporation.
It's been a tough year for us. After we paid our expenses, payroll of our employees and payroll taxes for our employees there is no funds left to pay me.
But I have to eat too. So I have borrowed money against company assets so that I can at least eat.
I have set it up so that the money the company borrowed has been loaned to me. Do I have to count this as income?
I was thinking that on any other loan I do not have to count as income, because the money I pay a loan back with is counted as income. Basically funds are taxed prior to the loan being paid back.
Do I have to count money I borrowed from my company as income? Proceeds from a loan are not taxable. Since the loan has to be repaid, it's not income.
However, if you received a W-2 for your work from the S-corp, you will have to include the amount shown on the W-2 as income. (While the loan isn't income, the S-Corp is supposed to pay you reasonable wages. You cannot decline to be paid.)
If you later default on the loan and the bank cancels the debt, the cancelled debt can be income to you. A loan is a loan. Just as if it was to another person.
Write up a loan contract if you have not already and sign it, charge yourself some reasonable level of interest.
I think the loan money would be an expense for the Corp and the repayment would be income for the Corp. When you borrow money from Dodge to buy your car, it is not income, so this should not be either.
With an S-Corp you should have a CPA (not required, unless you want to save $) and they should be able to help you clear this up. I often loan money back and forth, but it always is rectified before tax time so it is not carried over to the next year.
One way or another you are going to pay the taxes, hopefully it will be on the money you earn to pay your loan back to your S-corp.
All of your Corp. taxes are rolled over to your personal taxes (S-corp style) and I think the loan would be a loss for this year.
The $50 in advice from your CPA will be worth it. Ask your question clearly so you can get a simple answer and you may not be charged at all.
Be weary of the previous answer. I do not think that he understands that you borrowed from your own company and that this will not end up on your W-2 that you write for yourself. You need to be careful using an S-corp for this kind of stuff. There are some huge holes in the ground that allow the IRS to treat you like a corporation and impose a tax on your business income.
I'll look up the penalties and get back with you.
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Sorry it took so long.
Correct me if I'm reading you wrong here. What it looks like you're saying is that you own an S-Corp (I'm assuming you own 100% of the stock), and your S-Corp got a loan secured by S-Corp assets. I think it doesn't really matter who got the money at first, it will be considered a compan loan because the company is at risk for it.
After you got the loan, you took some or all of the money for personal use. When you did this, what happened was the S-Corp elected a shareholder distribution. This is because the relationship you have with the company is one of ownership.
So your corp is going to end up paying the interest and using the distribution rules to pay you, and you will end up being taxed as if you received a dividend.
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The reason I mentioned tax penalties in the beginning is because S-Corps are kind of a stupid way to do business. They are liable to ALL tax laws of C-corporations unless specified in subchapter "S". It's easy to lose your "s" status, but in this case you might be safe.
It might be a good idea to get a second opinion on this to make sure I'm advising you accurately. If your company is too small to pay some yahoo $500 per hour to tell you the same thing, you might want to consider just paying the dividend tax. It won't amount too much.
One thing you have to be really careful of is making your business insolvent. If at any time you find your company assets are valued less than your company liabilities, get some advice before you do anything like changing your form of business. This is a penalty covered by 357(c), and the difference can be taxed as income. You can avoid this if you take some steps in advance to avoid it, one of the strategies that has FAILED in the past involves company loans to shareholders, and that's the one I was researching. |
