S Corporation Debt: Planning Opportunities With Shareholder Loans to S Corps

Description

A significant benefit of ownership in an S corporation over owning partnership shares is the ability of S corporation shareholders to create debt basis by making a direct loan to the corporation. This debt basis can be used to offset distribution gain or limitation of loss deduction when losses exceed the shareholder’s stock basis in the entity.

Calculating and utilizing debt basis creates both challenges and opportunities for tax advisers. By accurately tracking debt basis, advisers can engage in year-end planning steps to manage the tax consequences of cash receipts by the S corporation shareholder. Advisers need to be thoroughly familiar with the ordering rules for reduction and restoration of debt basis, and the current year tax treatment of cash payments to shareholders with debt basis to optimize tax results.

Situations such as when a shareholder has made multiple loans to the S corporation, or when the shareholder takes cash as repayment of a loan to the corporation can complicate the tax treatment. Shareholders and their advisers can avoid negative tax consequences by properly structuring and documenting payments and distributions to a shareholder with debt basis.

Listen as our experienced panel of tax advisers provides a detailed and practical guide to the reporting challenges and planning opportunities of S corporation debt basis, and outlines best practices to help S corp shareholders avoid unnecessary tax.