Make Your Shareholder Loan Audit Proof

When a business owner takes a loan from their company, it’s entered in the books as a “shareholder loan”. But, if your tax return is audited, the IRS will put your loan under a microscope to figure out whether or not it was actually disguised wages or a dividend, that would be taxable to you as income.

If you know what the IRS will look for, it can be useful in structuring your loan arrangement. If you are audited, here are a few things the IRS will look for:

* Your relationship to the company. The first thing the IRS will look at is what your relationship is to the company. If you’re the sole shareholder and have full control over earnings, it may reduce your argument that it was a legitimate loan. However, if you are one of several shareholders and no one else received similar payments, this would suggest that perhaps it’s an authentic loan.

* Details of the loan. The IRS will need to know all details pertaining to the loan. For example: whether or not you signed a formal promissory note, any security pledge against the loan, as well as the specific maturity date or repayment schedule. There may also be questions about your interest rate and if you missed any payments. The loan debt will appear more genuine when the terms are more businesslike.

* Financial details. The IRS will not only want the details of the loan, but they may ask if you are receiving a salary from the company that is in line with the duties you perform and if the company pays dividends.

Dependent on all of these factors, the IRS will determine if you will pay tax on your loan. If you have paid close attention to the loan details, the loan should endure the scrutiny of the IRS, 

If you need further information about taking a loan from your business, contact our office at (866) 497-9761 to schedule an appointment with our advisors.