* First, the IRS will look at your relationship to the
company. If you're the sole shareholder with full control over earnings, that
may weaken your case that the loan is genuine. On the other hand, if you're one
of several shareholders and none of the others received similar payments, that
suggests it might be a genuine loan.
* Next, the IRS will look at the details of the loan.
Did you sign a formal promissory note? Did you pledge any security against the
loan? Does the loan have a specific maturity date, or is there a repayment
schedule? What rate of interest are you paying? Have you missed any payments,
and if so, has the company tried to collect them? The more businesslike the
terms of the loan, the more it will appear to be a genuine debt.
* Finally, the IRS will consider other factors. Is
your company paying you a salary that's in line with the work you perform? Has
the company paid dividends, or is this the only payment to its shareholder? Is
the size of the loan within your ability to repay? How does the size of the
loan compare to the company's profits?
Whether the IRS will try to tax you on the "loan"
will depend on all these factors. If you've paid attention to the details, the
loan should withstand IRS scrutiny. Contact us at (518) 798-3330 if you'd like more information
about borrowing money from your closely held corporation.
