S-Corp Loan from shareholder vs APIC

[revetaxes]

Need help! Working on a new client's 1120s, the loan from shareholder is actually capital contribution since the corporation was set up.  My question is how I can move out the loan from shareholder without raising a red flag and input the amount in additional paid in capital.  Will there be tax payment if repay the loan from shareholders (actually a returned capital event)?  Thank you for anyone taking the time to answer the question.

[qbteachmt]

Are there other shareholders, or just this one?

[revetaxes]

Two shareholders, husband and wife.

[Ozzy CPA]

I am very interested in this answer as well

[revetaxes]

Still waiting for a solution.  Could someone help?  Thanks for all the help.

[BobKamman]

ROFL  that someone thinks there is a little man with a green eyeshade at IRS who is comparing balance sheets from one year to the next to spot inconsistencies in Mom-and-Pop businesses.  But first, how do you know it is capital contribution and not a loan?  Was there a corporate resolution, indicating that was the decision?  Have you asked why it was called a loan last year?  Do you know why it is usually better to call something a loan rather than capital contribution, up to the point where you don't get questioned about inadequate capital?

[qbteachmt]

I suspect the reason you are waiting, is that your issue isn't clear. While you can get help here using the tax program (don't know which you are using: Lacerte, ProConnect or ProSeries?), no one here can tell you and your client what they should be doing.

I asked if there were other shareholders, for clarity. You cannot throw around "additional capital" as if it has no impact. Here's the other issue in what/how you asked:

"the loan from shareholder is actually capital contribution since the corporation was set up...if repay the loan from shareholders (actually a returned capital event)?"

You don't seem to know if this is Loan or not. You can't call it APIC and then ask about repayment of the loan. These are not synonyms, and you seem to have a grasp on that, then you mix up the process.

Your taxpayer needs better guidance. I like to use web resources, as well as finding a good mentor. If your taxpayer is a self-guided researcher...

https://smallbusiness.chron.com/shareholder-loan-vs-equity-investment-78974.html

https://www.fundera.com/blog/shareholder-loan

https://www.martindale.com/legal-news/article_boylan-code-llp_2231906.htm

https://www.zenbusiness.com/blog/3-things-you-should-consider-before-lending-money-s-corp/

https://www.journalofaccountancy.com/issues/2004/nov/avoidthetaxtrapwhenrepayingshareholderloans.htm...

[Ozzy CPA]

Interesting Topic, Thank you

So if the money is put into APIC, and the Shareholders take distributions through the year, are those set off against the APIC? 

[sjrcpa]

No. Distributions come out of AAA/Retained Earnings. APIC does not change.

[revetaxes]

Thanks for your reply.  Maybe I did not make it clear in the question.

1) The owner of the S Corp is a real estate investor.  The assets were transferred to the S Corp.

2) The prior tax preparer just plugged in the balance of the L schedule to Loan from shareholder without talking to the client.  And it has been done for several years already.

3) There was no loan agreement such as interest rate and the pay back term and etc.

That is why I think it should be capital contribution not a loan from shareholder.

[shuixin156]

I have a similar situation here. Did you have a conclusion? Thanks!

[Pam1040]

I have the same situation.  Previous tax preparer plugged the amount into "Loan From Shareholder", but client says it was never a loan and has never made/received any loan payments and does not plan to. Would like to reclassify as Add'l Paid In Capital as it should have been. Worried it will raise a red flag.

Client is a Single Owner S-Corp. 

Any guidance or suggestion is much appreciated!

Pam1040

[sjrcpa]

Just do it. Document in your file what client said.

FI - this plug probably arose because your client is not keeping proper corporate books (ie a Balance Sheet)