Hi all!

Can someone please explain the rules for imputed interest tax owed BY a shareholder on 0% interest loans made TO an S corp?
-Is it based on the shareholder's loan basis?
-Is there a $10K cut-off below which there is no imputed interest?
-Does a 1099-INT get issued to the shareholder?
-Does the S corp take a deduction on the imputed interest?

There are no clear explanations on the irs web site.
Thanks

Can someone please explain the rules for imputed interest tax owed BY a shareholder on 0% interest loans made TO an S corp?======>> The interest rate charged must be at least as much as the applicable federal rate, which is determined monthly by the IRS and posted on the IRS website;if not, the irs may impute interest unless the loan amount is less than $10K.


-Is it based on the shareholder's loan basis?====>>


-Is there a $10K cut-off below which there is no imputed interest?=>Yes.


-Does a 1099-INT get issued to the shareholder?===>I guess so since when the rule applies, the corp deemed to pay interest to the shareholder and the s/h deemed to receive interest from the corp.

-Does the S corp take a deduction on the imputed interest==>>the s corp may/ may not deduct the interest exp depending on the facts surrounding the loan.

Wnhough - Thanks for your response.

1. Please retype your response to this question:
-Is it based on the shareholder's loan basis?====>>?

"Loan Basis" is the running total computed by our former accountant for Schedule L line 19 " Loans from Shareholders". They only stated beginning and end of year amounts.

2. It appears that my running loan total has been over $10K for a few years, but the accountant never provided 1099-INT or reported interest on K-1 line 4. Were they in error?

"Loan Basis" is the running total computed by our former accountant for Schedule L line 19 " Loans from Shareholders". They only stated beginning and end of year amounts.=======>>>>>>All right. I know what S corp loan basis is; in this case, I guess so. I may say any interest paid by the corp would equal the interest you must report as income on your individual return, so in effect they would cancel each other out. However, under the tax rule, the corp is required to pay interest on the loan, the shareholder/owner makes to it.
As said previously, there is an exception if the loan balance is less than $10K. In that case, no interest is required. If the loan basis exceeds $10K, then yes he needs to charge an interest rate at least as high as the applicable fed rate.If there is no stated interest in the loan agreement, both the borrower and lender, on their tax returns, impute the interest and treat it as if it were paid. In other words, part of the loan payment will be treated as interest expense for the s corp or interest income for shareholder. The interest the corp pays is deducted on Form 1120-S as an ordinary and necessary business expense, thus reducing the corporation's taxable income.

2. It appears that my running loan total has been over $10K for a few years, but the accountant never provided 1099-INT or reported interest on K-1 line 4. Were they in error?======>>>>>>>>>>>>>Yes; for example, say, there is an official loan from a s/h to the S Corp. Every year, the biz pays the s/h the interest as in the loan contract. Then, the biz Is required to file a 1099-int? it is not handled through sch k-1 of 1120s or etc;so, the S corp needs to issue the 1099-Int as if it were a regular transaction between the S corp and a non-shareholder. I guess you can briefly create loan agreement between you and the s corp.

Hi again Wnhough et. al.

The accountant previously doing our S corp returns (3 partners) said for this case not to worry about the imputed interest.

"As you are a cash basis tax filer, you will only have income in the year the interest is actually paid, if ever. Thus, I wouldn’t be concerned if I were you."

Also, the loans have mostly been me just paying for stuff directly and there is no formal loan agreement. The company is currently running at a loss, and this would be a big, hard to compute can of worms to open.

Quick question: Would the imputed interest be computed on just the Amount Above $10K, or the Entire Balance ($33K)?

Thanks

#1;Possibly; needless to say,hopefully, aslongas irs says ok, then, no problem at all ; if not, you need to prove that it is NOT a loan for S corp. however,It seems that it may be better to have the investment booked as a loan to the corp, with the corp paying you interest. If it is your capital contributions to your S corp , then , it is OK; interest is not paid on "capital contributions" as they are just that, "capital contributions. Capital contributions increase your S corp stock basis. Loans are loans, increasing basis only to the extent that they are needed to take losses. At that point, repayments are capital gain items as a percentage of stock basis vs loan basis.I guess in general, it is fairly common in practice to use loans for cash contributions after the initial formation of the corp since "distributions" must be based on ownership % and that return of capital ,APIC, is based on the ordering rules, but the loans seem like a convenient method for returning cash to you, a shareholder/EE of the corp without having to worry about maintaining ownership % of the group like in an actual distribution. if an S-corp had 3 shareholders, 60% ,30% or 10%, and each pumped their % of 200k into the corp, would you classify this as shareholder loans or capital contribution? If the intention isn't to pull the money back out soon, would it be more "appropriate" to classify it as APIC? I guess what I'm seeing is that loans are preferable over capital contributions most of the time, especially if the corp will have the ability to pay interest on the balances at year end.S corp shareholder/EEs prefer loans after the initial capitalization, primarily for the purpose of not worrying about disproportionate distributions. In this situation, IF IF IF your S crop is getting audited by IRS (even if it is rare situation), you probably need to logically at least I guess, prove they are NOT SH loans to the S corp. So it is up to you if you treat them as loans to your S corp or your cap contributions to the S corp or etc.

note; Even a loan from you to the S-corp could be recorded two different ways: as equity I mean, Additional Paid in Capital, or as a liability perhaps N/P . If the corp is able to repay you in the same year as you provided the loan, it is probably easier to keep it as a loan. So at the time of depositing the funds to the business bank account or you spend it for the corp or etc. you would record it as a "deposit" and under the From Account you would use the Loan from Shareholder liability account.When you are issuing a repayment check, then you may record it as a regular check and code it to the same Loan from Shareholder account.You do not need to repay the whole amount at one time.You can charge interest. The interest will be an expense for your S-corp and an income for you personally. The tax law requires you to charge and record and report this interest if the amount of loan to you at the end of the tax year is substantial over $ 10,000. In this case you want to have a written contract for the loan between you and your corporation and the schedule of the repayments should be similar to a commercial loan (as if you had borrowed the money from a bank).

also as mentioned previously,ASLONGAS there is an official loan from a s/h to the S Corp. Every year, the biz pays the s/h the interest as in the loan contract. Then, the biz Is required to file a 1099-int. it is not handled through sch k-1 of 1120s or etc;so, the S corp needs to issue the 1099-Int as if it were a regular transaction between the S corp and a non-shareholder. so if you want, you can briefly create loan agreement between you and the s corp;in principle,under Internal Revenue Code, the corp is required to pay interest on the loan you make to it.The interest rate charged must be at least as much as the applicable federal rate determined monthly by the IRS and posted on the IRS Web site.UNLESS there is stated interest in the loan agreement, both the borrower and lender, on their tax returns, impute the interest and treat it as if it were paid. In other words, part of the loan payment will be treated as interest expense or interest income. The interest the corporation pays is deducted on Form 1120-S as an ordinary and necessary business expense, thus reducing the corporation's taxable income. ONLY if you do a book entry , if not, the corporation might lose the deduction.


#2;Only on your loan amount; the tax coderequires you to charge and record and report this interest if the amount of loan to you at the end of the tax year is substantial over $ 10K.
You can read the Sec. 7872 imputed interest rules.

Thanks again for your detailed response.
The main point, I guess, is that the company will probably never have the means to repay the loans -EVER-, and it would be treated as a "Bad" loan. In fact, unless we find a buyer or investor, we might be shutting the company down soon.
I think, in that case, the imputed interest is delayed ???