Tax Court Decision: Document Loans or your Corporation’s repayment may be taxed as Wages

Can a loan to your business be subsequently taxed as a wage on repayment?  According to a recent U.S. Tax Court opinion, the answer is yes—if you are not careful.  The court held that if a loan is not properly documented and does not contain the other requirements, the IRS may consider the original loan to be a capital contribution and the repayment to be a taxable wage.  This means you will unnecessarily lose much of your investment to taxes if you do not complete all necessary paperwork.

This underscores how important it is to complete all paperwork each time you provide a loan or make any other transaction with your company.  The sole shareholder in the recent decision likely would have avoided the tax if he drafted a written agreement, proper promissory note, set interest, and set a repayment date.

We always advise our clients to complete all formalities when making any transaction.  If you need any assistance with your transactions, please contact an attorney with the Day Ketterer Business Practice group.