Loans between owners and the small businesses they own (shareholders of corporations and members of LLC’s) are subject to special scrutiny. If the loans are not documented correctly, the IRS will treat them in ways that may result in unfavorable tax consequences. These loans must meet certain minimum standards that include:
- There must be a written unconditional promise to pay (promissory note).
- The loan must be due on demand or on a stated due date.
- A reasonable rate of interest must be stated or be determinable by reference to a published rate.
- The borrower must be creditworthy.
- Payments, including principal and interest, must be reasonable. At least the interest must be paid on an annual basis.
If the above provisions are not in place, now is a good time to have your legal representative prepare the appropriate documentation.
Disclaimer : The information included in this blog post is general in nature and should not be acted upon without further professional assistance.