Business loan used to purchase shares

[Avs19]

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?

[IRonMaN]

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

[Avs19]

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

[IRonMaN]

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

[Avs19]

The sale and purchase agreement is between the owners

[sjrcpa]

"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?

[Avs19]

"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

[sjrcpa]

"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?

[Avs19]

"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?

[qbteachmt]

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?

[Avs19]

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.

[IRonMaN]

But as Susan asked, is that their intent?

[Avs19]

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

[IRonMaN]

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

[Avs19]

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]

"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.

[Avs19]

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. 

[abctax55 · Accepted solution]

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

Happy Labor Day to all

[Avs19]

Thanks for all of your help!