Can I Reclassify S Corp Distributions as a Shareholder Loan?

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If you purchase the shares of an S corporation, you may receive periodic dividend payments, depending on the firm’s financial situation and management’s decisions. The law also allows you to borrow from the business, as long as top leadership properly discloses the transactions in the firm’s financial statements and regulatory filings.

S Corporation Distributions

  • An S corporation is a form of business that elects to pay taxes in accordance with a section of the Internal Revenue Code called "Sub-chapter S -- Chapter 1." An S corporation can only have up to 75 shareholders and is exempt from taxation, as long as it conforms to the law and passes its revenue information on to shareholders' tax filings. S corporation distributions are periodic dividends that shareholders receive either in cash or stock. Accountants refer to these distributions as cash dividends or stock dividends, respectively. Shareholder distributions reduce corporate equity because it's money the firm is paying back to those who initially poured money into the business.

Shareholder Loan

  • A shareholder loan is money a company advances to a stockholder, generally at preferential terms -- like a lower or no interest rate and generous repayment terms. The law allows such a financing scheme, as long as the business makes appropriate disclosures in its regulatory filings and tells investors what it did, why it did it and who the lucky borrower was. Accountants report shareholder loans as short- or long-term assets, depending on the maturity. If the lending S corporation expects to receive funds within 12 months, the correct classification is “short-term assets.” Otherwise, accountants indicate the loans as long-term notes receivable.

Explanation

  • Now that you understand the difference between an S corporation distribution and a shareholder loan, you can see why you can’t reclassify one as another. As an S corporation shareholder, you’re entitled to receive periodic dividends, in accordance with the company’s bylaws and based on management’s assessment of the company’s cash position. When you receive a dividend check, the money is yours. If you need extra cash, you may discuss with the firm’s leadership to determine whether you could get a loan. But you can’t reclassify cash that's already yours as borrowed money you must repay. Maybe a related question is whether you can reclassify an S corporation dividend as a loan you’re granting the company. Even in this case, you wouldn’t classify the new cash injection as a loan but as an equity investment.

Financial Reporting

  • An S corporation reports cash or stock distributions in two accounting reports: a statement of retained earnings and a balance sheet. The business reports shareholder loans in its statement of financial position, which is the other term for balance sheet.

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