If an S corp has 2 owners with a 60/40 split, when distributions are made is it required that the distribution be made or can one of the shareholders loan the distribution back to the company
In an S corporation, distributions must be made proportionally to the ownership percentages of the shareholders. Therefore, if the S corp makes a distribution, it should be split according to the 60/40 ownership structure. However, once the distribution is made, each shareholder has the discretion to use their distribution as they see fit. If one of the shareholders wishes to loan their distribution back to the company, they can do so, but it must be structured properly as a loan. This means there should be a formal loan agreement with terms such as interest rate, repayment schedule, and documentation to substantiate the loan. This ensures that the transaction is treated as a loan for tax purposes and not as a capital contribution or another form of equity. It's important to maintain clear documentation to avoid any potential issues with the IRS, as improper handling could lead to reclassification of the transaction, affecting the tax treatment. Additionally, the loan should be at a fair market interest rate to avoid imputed interest issues under IRS rules. Consulting with a tax advisor or legal professional is recommended to ensure compliance with tax laws and proper documentation of the loan.
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