Loan Payable to 100% owner of S Corp

[jskouberdis]

I have a situation and I believe that I am over thinking it.  The situation is in 2021 an S Corp will be dissolving and terminating operations.  The S Corp is owned !00% by one person.  Through the years he advanced the company $50,000 and will never be repaid.  My first inclination is to run it through the AAA account to zero everything out and on his personal return take short term capital loss as a non business bad debt.  Which is what I prefer to do.

When I started overthinking this I said to myself should the company have COD income because they did not repay the shareholder loan.  If I do this then the shareholder will get no tax benefit at all since the COD income will be included in the K-1 for the same amount as the non business bad debt that I will be taking.  These two transactions will offset each other and he will get no tax benefit.  

I believe my first approach is correct.  Let me know what the community thinks about this.

Thanks for your time.

John Skouberdis

[sjrcpa]

How about the shareholder redesignates it as a capital contribution?

[jskouberdis]

There are no written notes.  These are just advances to the company when they need money.  Could I just recharacterize them as capital contributed with a journal entry or would I need some type of written confirmation from the owner.  Can I just use the AAA account for capital contributions and repayments of contributions can be just distributions or should the AAA account be used more for permanent type of items.

Thanks for your previous response.

[qbteachmt]

"and repayments of contributions can be just distributions"

You already told us the loan(s) won't be repaid: "he advanced the company $50,000 and will never be repaid."

Now there are funds available?

"There are no written notes. These are just advances to the company when they need money."

Or, capital infusions. In other words, money in and money out isn't Debt unless it's structured as such.

The real issue is, you seem to want to write it off as a loss: "take short term capital loss as a non business bad debt."

You also told us: "Through the years"

Unless you can straighten out this story and stand behind it formally as Debt, you should consider what it would look like if it is examined. Because from here, so far, it looks like capital from the Shareholder, and distributions to the shareholder. Not debt from one or more notes payable, interest and principal.

[jskouberdis]

qbteachmt,

Would you recommend prior to dissolution any unpaid amounts become capital infusions and that would increase the basis of the stock.  And for future reference do you recommend single shareholder companies use the capital account for money put into and taken out of the corporation?

John

[qbteachmt · Accepted solution]

Too often, people treat the corporation as their own piggy bank, and in the reverse, treat the shareholder(s) as their corporation's piggy bank. If people would apply the caveat that you and the corporation are separate entities, it helps people stop resuscitating a dying business with cash infusions, for one thing. If you learn to manage the financials well, you will also better manage the entity's success or failure.

I've done enough business reviews for potential buy/sells to know how often these conditions are fudged, to "make the financials look better" or not to reveal something to the banker. And why would you create a debt with interest payable, which means the corporation has a reportable expense and the shareholder has reportable interest income from their own entity that had the expense? Nothing like running the dollars around in circles until there is nothing left.

In my experience, the concept of indebtness needs to be fully respected and properly implemented when it is determined this needs to happen, which includes interest, a signed note payable, with the understanding that this is a true liability, and there will be payments made on schedule for debt service.

A good reason to use Debt exists when there is more than one shareholder and there is the need for one person to sustain the business that exceeds the ability of all parties to contribute. In this example, ask yourself this question: Could we borrow from any lender that would make the deal? If so, is there a better reason to make it an in-house lender? Is it favorable to both the business entity and that person?

If you would not borrow from an outside party, what makes it okay to call this Debt to that shareholder? You're leveraging their relationship just to get the funds, already; don't complicate it as Debt.