S Corp Shareholder Debt (open account v.s. formal note)

Forum|Forum|2 years ago
February 20, 2024
1 reply
24 views

I have a client which is a small S Corp with just one owner. The owner has a Shareholder Loan account to track her personal money paid for business and/or business account paid for her personal expenses.

The SH Loan account balance as of 12/31/2023 is more than $25,000, and I have a suggestion diagnostic from ProConnect: The program detected an open account debt with a loan balance at the beginning of year greater than $25,000. Open account debt with a prior year-end balance of more than $25,000, should be classified as a formal note at the beginning of the tax year and must be separately tracked. US - Ref #57034

My questions are:

(1) what's the proper way to convert the open account shareholder loan to a formal note in QB and in ProConnect?

(2) After making the beginning balance as a formal note, do I need to leave it as is and start to separately track current year shareholder loan in the Shareholder Loan account (open acct debt)?

MANY THANKS!

This topic has been closed for replies.

qbteachmt

Level 15

"and/or business account paid for her personal expenses."

And now they need to stop that nonsense. This shareholder formed a corporation, and this commingling of funds defeats that purpose. Yes, the shareholder might need to fund the corporation. No, the business never pays for personal expenses for the shareholder.

Is this the first year of these activities? If you net the two activities, do you have loan from the shareholder or loan to the shareholder?

You've used the phrase "open account" which is further indication she thinks this is her very own private bank. It's a separate and incorporated entity. Let's treat it as such.

That message is to flag you, and your shareholder needs to understand that the IRS requires imputed interest with this type of activity, because it isn't supposed to be treated so casually.

Google this:

shareholder loan over $10,000

And read a lot of the results

Don't yell at us; we're volunteers

A

AyhnAuthor

Level 3

Thanks for your reply. The net result is that the company owed her $25k+. She normally doesn't pay personal expenses from business account, just a few transactions by mistake I believe. So, back to my questions, if I need to convert the Loan from Shareholder to a formal note, what shall I do? Thanks.

sjrcpa

Level 15

Have her draw up a note with adequate stated interest and repayment terms.

The more I know the more I don’t know.

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