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S-Corp Loans Question

Two owners of an S-corp have loaned the S-corp funds

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I had a question I wanted some opinions on. Two owners of an S-corp have loaned the S-corp funds for various reasons over the past few years. The loans are documented stating they are loans but there is not interested that was charged. Most loans were over $10k.

What are the possible negative effects of this in case of an audit? I understand the IRS could consider these to be capital rather than loans.

The S corp has never had a profit.

Thanks for your thoughts!

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Scott
By Eccp19
Nov 29th 2018 22:37

My understanding is that if there are not active payments by the S-Corp back to the shareholders, it is riskier from an audit standpoint that the IRS could disallow the amounts as loans and to reclassify them as capital contributions. This is a much less risky situation to be in though than if the corporation was "lending" the shareholders money without a proper note set up.

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By Kennith Yost
Feb 6th 2019 09:30

In case of an audit , if the loans are not repayed or not interested they are considered to be capital rather than loan. This is a very negative situation for the company.

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