You already know you can be taxed on money you take out of your corporation. But not all corporate owners know they can be can be taxed on money put into the corporation, if it's a loan.
Stockholders who lend to their corporations are expected to charge interest on the loan at the market rate. Those who charge less, or nothing, can be taxed as if they charged at a rate periodically determined by IRS under a federal law. Specifically, the difference between that rate and the lesser (or zero) rate actually charged by the stockholder is taxable to the stockholder as interest income-and the corporation is allowed a corresponding deduction. This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursement, also counts as a loan.
IRS agents are alerted to such loans by the corporation's tax return, which asks about "Loans from stockholders."
TIP: Review any loans or expense advances to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.
TIP: You may want to convert all or part of the loan to a capital contribution or purchase of stock. Consider seeking professional advice on how your business should be capitalized.
TIP: You might decide to regularize the transaction by fixing an interest rate and payment schedule. Your tax advisor can suggest an acceptable interest rate that will stop IRS from taxing you at a higher rate later should interest rates rise while the debt is outstanding.
Note: Loans to unincorporated businesses normally aren't subject to this below-market-loan rule.
If you would like to discuss any of the issues raised in this summary