Form 1120-S CPA discusses S Corporation Loans to and from Shareholders | Form 1120-S, U.S. Income Tax Return for an S Corporation

When Form 1120-S CPAs see problems with S Corporation accounting it usually involves the Balance Sheet. Which is understandable. Most S Corporations are small enough that the managing shareholder can track financial transactions by memory. And without some training, the Balance Sheet isn’t as useful for managerial purposes as the Income Statement. But brilliant minds have crafted managerial tools using components of the Financial Statements. I’ve always thought it’s a shame S Corporations lose out on that opportunity.

The IRS takes an interest in loans between the S Corporation and Shareholders

“I think the IRS worries about the S Corporation loaning money to shareholders that never gets paid back and thus escapes taxation. But in my experience as a Form 1120-S CPA, the Shareholders more often lend money to the S Corporation and never get it back, meaning those funds are double taxed - ouch!”
- Gary Bode, Form 1120-S CPA

Two lines of the balance sheet section of Form 1120-S, U.S. Income Tax Return for an S Corporation, are devoted to such loans. Just because the IRS takes an interest in some S Corporation issue doesn’t mean it’s taboo. And that’s the case with S Corporation loans to and from Shareholders. When I prepare Form 1120-S I like to document the loan figures on page four. I think as long as good records are kept there’s no big deal with such loans. See other suggestions below. But good records aren’t always kept. I don’t know if the IRS audits specifically on shareholder loans but once an audit starts, shareholder loans usually get close inspection.

Corporate Schizophrenia

Your S Corporation is a distinct entity by itself, even though you own it. Many IRS audit parameters look for co-mingling of S Corporation and personal finances. Even I feel strange sometimes when I structure transactions between myself and the Firm. I own 100% of it. I am the S Corporation. But the IRS doesn’t see it that way.

Use formal structure with shareholder loans

Here’s what I’d like to see if I was representing your S Corporation for an IRS Form 1120-S tax audit.

• Detailed history with documentation for all loan related transactions.
• An actual loan document between the S Corporation and shareholder. Even though it seems like you’re only passing from one hand to the other.
• Documentation of the loan in the Corporate minutes.
• An established interest rate.
• Formal payments.

If you pay attention to only one aspect of the Form 1120-S, U.S. Income Tax Return for an S Corporation, balance sheet make it loans between the Shareholders and S Corporation.

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