S Corp owner uses SBA loan for personal

[Strongsilence-CPA]

S Corp owner gets SBA loan. (I have not seen the loan documents but I assume are in the name of the corporation).  It is apparent that she used those funds to build a personal residence and to invest in stocks personally.  Any CYA needed on my part?

The large SBA Loan Liability and the related SH Loan receivable on the Balance Sheet seem like an invitation to audit. 

I have advised her to create a loan document, sign it, and repay it in equal installments with interest at the AFR.

[IRonMaN]

Some people really shouldn't have corporations.  But I think you did what you can do.

[George4Tacks]

Just to stir the pot - Is it a substantiate shareholder loan, or is it a distribution or maybe just embezzlement? 

In general I hate S-Corps, just because of this type of behavior. This is where I get out my 11 foot pole for something I wouldn't touch with a 10 ft. pole. 

Then I load up on some extra Fireball Whisky. 

[Grateful2002 · Accepted solution]

Ouch! I have a SBA loan. Of course, it is in the name of the corporation. Is that a SBA disaster loan as well that were given during Covid?

From the tax perspective, if there is a loan agreement, etc, then it is fine. From the SBA perspective, if that loan was a SBA disaster loan, then what she did is a crime. Those funds cant be used for that purpose. Illegal. I have heard of the SBA audits. It's not fun. 

[Grateful2002]

Right.

Also, from the SBA perspective, if that loan is a SBA disaster loan that was issued during Covid ( many businesses got those loans and then spent the money on whatever), then what she did is a crime. Those funds can't be used for that purpose. Illegal. There are certain requirements on what those funds can be used only. I have heard of the SBA audits. It's not fun. Disaster SBA loans are taxpayers money so there are strict requirements or go to jail. 

[Strongsilence-CPA]

Thank you.

It could be framed as a loan.  Definitely not a distribution. 1/2 of the money is unspent and is currently held in an investment account.  She can repay 1/2 of it.

Embezzlement. From your own corporation?  I didn't think of that.

[Strongsilence-CPA]

Thank you.  I learned something.

[Grateful2002]

These are the SBA loans I am referring to. If she has this, she is in trouble. 

https://www.sba.gov/funding-programs/loans/covid-19-relief-options/covid-19-economic-injury-disaster...

Uses of Proceeds

Working capital to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, and other ordinary business expenses, and to pay business debt incurred at any time (past, present, or future)

I would probably ask for the note/loan docs to check.