taxes, s-corporationI manage a small S-corporation. Does anyone know if loans to corporate officers, intended to be repaid at a “reasonable” interest rate, are required to be reported on a Schedule K-1? What would be a “reasonable” interest rate?
Officers loans are only reported in an S-Corp Form 1120-S on the balance sheet Page 4 Line 19. However the total annual amount of repayment of loans is reported on Schedule K line 16e on page 3 of the 1120. The portion of repayment for each shareholder is reported on Sch K-1 Item 16e. The reason repayments are reported is because shareholder loans can be used to allow losses to be deducted. The repayments reduce the amount of loan and may force recapture income.
Form 1120-S https://www.irs.gov/pub/irs-pdf/f1120s.pdf
Form 1120-S Schedule K-1 https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf
Form 1120-S instructions https://www.irs.gov/pub/irs-pdf/i1120s.pdf
Loan to officers under reasonable terms are acceptable and no problem to the company or the officer/shareholder. Normally the officers want the lowest rate allowable. That rate or rates is the AFR Applicable Federal Rate.
TimeValue.com has the rates which vary per month and per length of the loan. Here is the link. http://www.timevalue.com/products/applicable-federal-rates.aspx
To substantiate the loans there must be written loan documents. Also the must be followed. Failure to do so may result in deemed income to the borrower.
All content is licensed under CC BY-SA 3.0.