Are Corporate Advances to the Owner Loans, Dividends, or Salary?

If you operate your business as a C or an S corporation and if you loan money to the corporation or the corporation loans money to you, you need documentation that the loan is a loan.

With the S corporation, the loan that fails as a loan can result in taxable wages to you.

With the C corporation, the loan that fails as a loan can result in taxable dividends to the shareholder.

Good News, Bad News

Nariman Teymourian got a real shock when, at the end of his IRS audit, the IRS claimed that he owed over $600,000 in taxes and penalties, primarily because he had received advances from the corporation in which he had majority control.

Good News:?Mr. Teymourian won his case in court and paid zero additional taxes.

Bad News:?Mr. Teymourian had to go to court.

If you own a C corporation, pay attention to your advance account. When the IRS looks at your advance account, it makes one of two decisions:

1. The advances are loans from the corporation to you.
2. The advances are disguised dividends that should be taxable to you.

Obviously, there is a huge difference between a loan and a taxable dividend.

The Teymourian Story

Mr. Teymourian was building a home. His corporation made some big advances during this building effort. The paperwork between Mr. Teymourian and the corporation was not close to perfect, and that triggered the problems with the IRS.

Key Point:?Operating as a C or an S corporation requires that you be pretty good at paperwork.

Mr. Teymourian won his case, but he also had the displeasure of the IRS’s company in court.

To Do List for You

Here are seven magic questions to which you want to answer “yes” to ensure that your advances are treated as loans. (We structured these as after-the-fact questions, because you would be giving your answers to the IRS after the fact.)

1. Did you sign a promissory note or other document promising to repay the money to the corporation?
2. Did you pay interest on the advances?
3. Did you make payments on a fixed monthly, quarterly, or other schedule?
4. Did you give the corporation collateral to secure your repayment?
5. Did you repay the loan?
6. Did the corporation check to make sure you had the ability to repay the loan (i.e., did it look at credit reports and statements of net worth)?
7. Did both you and the corporation conduct yourselves as if the advances were loans?

Remember, if you are asked these questions today about last year or the year before, you want “yes” answers. The more “yes” answers, the better.

Takeaways

If you fail to document loans between you and your C or S corporation, only bad things can happen should you face the IRS in an audit.

In the world of real estate, knowledge is power, and now you’re armed with an understanding of the benefits that strategic deductions can offer. As you embark on your journey to maximize property value and navigate the intricacies of tax strategies, remember that the correct decisions can make all the difference.

If you’re ready to take your property investments to the next level, our team at Morris + D’Angelo is here to help. We specialize in guiding property owners and investors through the complexities of tax planning, ensuring you’re on the path to financial success.

Don’t let complex tax laws hold you back – contact us at Morris + D’Angelo to learn how we can support your financial success! This is our Expertise!

Parts of this article are published with permission from?Bradford Tax Institute , ? 2021 Daniel Morris, Morris + D’Angelo

Daniel Morris

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