"palolaw" <larry[at]palomarespa.com> wrote in news:10f8t1214lk8f4

- quote -

I was intrigued by the first sentence of this post because
it describes our situation exactly: we recorded Loans from
Shareholders instead of Paid-in Capital to fund the
operations of our C-corporation. Except we are not
liquidationg; we are re-paying the "loans" over time -
albeit without interest.

Q: Is this suggesting that the "right to receive a dividend"
as "consideration for these loans" is a valid defense
against IRS imputed interest rules?

Q: What is meant by a "flushing" account?

Q: How can the "flushing account" go negative if the loan
remains at its face value because it is not repaid?

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It is generally accepted common practice, in small
corporations, that shareholder loans are used in lie of
additional paid in capital. These loans are also generally
not liquidated until the liquidation of the corporate entity
or liquidation of the shareholder interest. Notably, the
consideration for these loans are the "right to receive a
dividend" as interest for the shareholder loan.

Generally acceptable accounting principles [GAAP] the loan
remains at its face value without repayment; the capital
account is thus the flushing account and it may go in the
negative to reflect the changes in financial reporting.

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"bookkeep" <kumikat[at]aol.com> wrote:

- quote -

The short answer to your question is yes - if the
particulars of the circumstances meet with certain fact
patterns, it is entirely possible to take money out of a
business and have it not be income on the owner's 1040. But,
it depends on several factors. The type of business,
Corporation - S or C, partnership or LLC, or sole
proprietorship, and the bases of the owners.

For any business, loan proceeds are not income to the
business so repayment of loans would not be deductible by
the business - accordingly, when a bank loans a business
money it is not a deductible item by the bank and when the
bank receives a repayment of those proceeds that money is
not income. The same rules apply if an individual loans
money to a business, whether they control that business or
not. For partnerships and LLCs the same general rule would
apply.

This rule gets a bit convoluted though when we factor in
basis. Money put into a business usually increases that
person's basis in their investment in that business and
money taken out generally reduces their basis. Consider
this example:

I start a business and put in $1,000 of my own money as
initial stock. (basis = $1,000)

The business still needs money so I loan in another $99,000
(basis = $100,000)

The business loses $75,000 on its first tax returns and
since it is a pass through business (S Corp or LLC), I get
to deduct that $75,000 on my personal tax return. (basis =
$25,000)

The business then borrows $100,000 from a bank and returns
to me the $99,000 I loaned in.

I now have $74,000 in taxable income to me - because I took
out more than my remaining basis in the loan - even though
the company owed me the money!

Example #2
I start a business and put in $1,000 of my own money as
initial stock.

The business still needs money so I loan in another $99,000

The business makes $75,000 profit on its first tax returns
and since it is a pass through business (S Corp or LLC), I
include that $75,000 on my personal tax return EVEN THOUGH I
don't take any money out right away because I want to make
sure the company has enough cash to operate.

The business then borrows $100,000 from a bank and returns
to me the $99,000 I loaned in.

This is NOT a taxable event to me because I have not taken
out more than my basis in the loan.

Good luck,
Gene E. Utterback, EA

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"bookkeep" <kumikat[at]aol.com> wrote:

- quote -

No idea. Depends on what kind of (I assume) corporation it
is. If they take out more than the amount owed, it's either
a distribution of profit (dividend) or of shareholder
earnings. Your accountant should be able to answer these
questions as you need to fill in a few more blanks here.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Boston, MA 02109

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bookkeep wrote:

- quote -

No, because all of the income of the S-corporation is
taxable to the owner, whether the owner takes it out or not.
Alternatively, yes, because items booked to a stockholder
loan account don't reduce the income of the S-corporation,
so that money (along with any other money that was left in
the corporation) will flow through on the K-1 and be taxable
to the shareholder.

Think of it this way: If you have a sole proprietor, and he
takes money out of the business, it's neither a business
deduction (which would lower taxable income) nor additional
income to him. It's a nothing. In most cases, the same is
true of an S-corporation.

Phoebe

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Could I please get some clarification on this? I am a
bookkeeper with clients who take money out & put money in
all throughout the year. the accountant told me to use the
Sockholder Loan account for these transactions. I set it up
as a liability, so obviously, all debits posted are the
owner's withdrawals or charges and the credits are monies
put into the business. My question is this: does that
account become income for the owner at YE? Can they take
out, say, $65,000 in a year from the business and not have
that be "income" to them for their 1040?

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Brett Williams wrote:

- quote -

The corporation doesn't pay out of retained earnings. It
does so out of assets, namely cash in the bank, that is if
it has the cash with which to do it.

But I know, or think I know, what you're trying to say, i.e.
since the corporation has earned enough money now, it can
now repay.

Cheer$,
Harlan Lunsford, EA n LA

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Can anyone enlighten me as to how to re-pay a "loan to
stockholder" out of the retained earnings of a small
S-corp.?

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