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Business loan used to purchase shares

Avs19
Level 5

A client of mine sold his shares in his S corp for 2 million back in March of 2023 to the other shareholders. The shareholders asked me to file the S corp return but it looks like the shareholders who purchased the shares took out a 2 million dollar SBA loan through the company to purchase the shares. I see this as a loan to shareholders but I don't believe there was a note between the shareholders and company. Any advice on how to handle this would be appreciated?

 

 

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abctax55
Level 15

delete.... this thread is too convoluted for my late Friday afternoon of a holiday weekend to comprehend.

Happy Labor Day to all

 

HumanKind... Be Both

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18 Comments 18
IRonMaN
Level 15

Are you sure the shareholders bought the shares or did the corporation buy back and retire the shares?


Slava Ukraini!
Avs19
Level 5

This is actually an LLC taxed as an Scorp so what was purchased was interest. Not sure how this changes things?

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IRonMaN
Level 15

What does the paperwork say?  Did the other guys actually buy his interest or did the business buy his interest.


Slava Ukraini!
Avs19
Level 5

The sale and purchase agreement is between the owners

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sjrcpa
Level 15

"I see this as a loan to shareholders"

Do the 2 remaining shareholders intend to repay it?

Might it be a deemed distribution to those 2, who then used it to pay the departing shareholder?

The more I know, the more I don't know.
Avs19
Level 5

"Do the 2 remaining shareholders intend to repay it?" I would assume that's their intention.

"Might it be a deemed distribution to those 2, who then used it to pay the departing shareholder?" This is my worry. Nobody want's to be taxed on this transaction

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sjrcpa
Level 15

"Do the 2 remaining shareholders intend to repay it?" I would assume that's their intention.

For $2 million, I would not assume anything. Ask.

If it is a loan to shareholders, loan agreements with adequate stated interest should be on file.

"Nobody want's to be taxed on this transaction"

Would this be distributions in excess of basis?

The more I know, the more I don't know.
Avs19
Level 5

"Would this be distributions in excess of basis?" Would the $2 million SBA loan give them basis? The new owners are guaranteers on the loan. My understanding is that an SBA loan does not give shareholders basis. Is this any different for an LLC taxed as an Scorp?

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qbteachmt
Level 15

To clarify who repays what:

" "Do the 2 remaining shareholders intend to repay it?" "I would assume that's their intention."

The entity took an SBA loan, but not for the business to operate. The shareholders are now using that money personally. Of course, the entity will repay the loan to SBA. No one pays taxes on a loan; it's the disposition of the proceeds that matter. The shareholders either repay the loan to the entity (like a wrap around mortgage) or the payments made to SBA on their behalf are distributions to them (man, this gets ugly) as a loan offset. Is everything 50/50?

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Avs19
Level 5

It sounds like the bottom line would be to have the the shareholders create an interest bearing loan between them and the corporation and start making payments.

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IRonMaN
Level 15

But as Susan asked, is that their intent?


Slava Ukraini!
Avs19
Level 5

Yes, if it's treated as a loan to shareholders, then the intent would be to pay it back.

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IRonMaN
Level 15

But that sounds like your intent.  What was the intent of the actual owners?


Slava Ukraini!
Avs19
Level 5

To be honest, I just referred this out  to another tax preparer. There were too many issues that were making me uncomfortable. 

Out of curiosity, if the intent was to pay it back, then I'm thinking a note between the shareholders and corporation would have to be in place.

What if the intent was to not pay it back?

 

qbteachmt
Level 15

"What if the intent was to not pay it back?"

(How) Could they have their business entity take out an SBA loan for them to personally buy NVIDIA shares?

Same difference.

*******************************
Don't yell at us; we're volunteers
Avs19
Level 5

Apparently, they didn't think this through much when getting the loan. The only way to get the loan was to go through the business. I'm pretty sure their intent will be to pay it back to avoid paying taxes on it. 

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abctax55
Level 15

delete.... this thread is too convoluted for my late Friday afternoon of a holiday weekend to comprehend.

Happy Labor Day to all

 

HumanKind... Be Both
Avs19
Level 5

Thanks for all of your help!