In short
Loans between a closely held corporation and its shareholders must look like real debt, with a written note, interest, a repayment schedule and actual repayment. Otherwise the tax law may recharacterize them.
Key takeaways
- A sham loan to a shareholder can be treated as a constructive dividend.
- A loan from a shareholder to a thinly capitalized corporation can be treated as equity, making interest nondeductible and repayments dividends.
- Interest below the applicable federal rate is imputed.
Where it's tested
TCP: C Corporation Tax Compliance — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A corporation has taxable income before the NOL deduction of $600,000 and an NOL carryforward of $700,000 generated in 2022. What is the maximum NOL deduction?