Owners occasionally borrow funds from their businesses. You may,
for example, need an advance to cover your child's college
costs or a down payment on a vacation home. If your company has
extra cash on hand, a shareholder loan can be a convenient and
low-cost option; however, it is important to treat the transaction
as a bona fide loan. If you do not treat it as such, the IRS may
claim the shareholder received a taxable dividend or compensation
payment rather than a loan. Here is more information to protect
shareholder advances from IRS scrutiny.
A Closer Look at AFRs
You can make de minimis loans of $10,000 or less to shareholders
without paying interest. However, if all of the loans from the
business to a shareholder add up to more than $10,000, the advances
may be subject to a complicated set of below-market interest rules
unless you charge what the IRS considers an
"adequate" rate of interest. Each month the IRS publishes
its applicable federal rates (AFRs),
