How to Handle a Shareholder Loan Payoff
An S-corporation has fewer than 100 shareholders or can be made up of only one. Unlike an C-corporation, S-corporations divide income and losses among the shareholders, who pay taxes on it as personal income. If the corporation's owners decide to put more money into the company, they may treat the cash infusion as a loan rather than an increase in the shareholder's investment. That way, when the corporation repays the loan, it isn't taxable income. The IRS may subject the loan to extra scrutiny, so it's important the loan be handled properly from the moment its created to the payoff date.
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Instructions
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Make out and sign a promissory note or a loan agreement. The note should state the amount of the loan, whether you're charging interest and whether the company is giving you collateral. Even if you're the sole shareholder, offering yourself collateral can put your debt ahead of other creditors if the company files for bankruptcy before the loan is repaid.
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Write down the terms for paying off the loan. The S-corporation can pay off the loan in one lump sum; make regular payments on the principal; or make interest payments until the date for paying off the principal. If you want to state that the loan is payable on demand -- meaning whenever you choose to get the money back -- that's usually acceptable.
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Create a separate liability account on the corporation books for your loan. If you have to make more loans, record them in the account too. Use the account and a spreadsheet to keep track of loans, corporate payments on the debt and interest you've earned; if you're ever audited, you'll need to show a clear paper trail.
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Pay the money back to yourself when the due date arrives, or when you "demand" payment. Record the payment in the liability account, then close the account once the debt is settled.
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Tips & Warnings
If you didn't record the loan and set up a liability account when you originally put the money in, you can do it after the fact, as long as the account and loan documents are accurate.
An S-corporation is a separate legal entity from its shareholders. Even if you're the only shareholder, you should still treat the loan as if you were giving someone else the money. If the IRS decides you're simply paying off the business debts with your own money -- as a sole proprietor might -- it may reject your claim that the money was a loan.
