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As an S Corp, do I need to consider loan repayment (originally a personal contribution) as compensation requiring a W-2?

After payment for business expenses, purchase of computer for business, purchase of Design Software Package and partial repayment of initial personal contribution (loan) to start my business, my net profit was $1600. I did not pay myself a salary during 2016 since I am employed full time at a manufacturing firm.

1 Reply
Level 13

As an S Corp, do I need to consider loan repayment (originally a personal contribution) as compensation requiring a W-2?

First, the S-Corp MUST pay you a "reasonable" salary or wage, a salary or wage that gets reported to you on a W-2.  Having a W-2 position elsewhere doesn't relive you of this obligation.

I'm not sure I'm following along with you on the "loan repayment/personal contribution" issue.  It sounds like you funded the S-Corp as a form of "equity".  At that moment the S-Corp's balance sheet would have an asset in the form of cash and an equity balance in the same amount.  Your personal balance sheet would reflect a decrease in cash and an asset of "investment in S-Corp" of the same amount.  It sounds like you then reclassified over in the S-Corp some amount of that initial contribution from "equity" to "loan payable to shareholder."  And your personal balance sheet would reflect a reduction in "investment in S-Corp" and a new asset of "note receivable from S-Corp.

(I fully understand that you've probably recorded NONE of this in this fashion, but I'm trying to give you the flavor of how interactions between "you" and the "S-Corp" SHOULD BE handled.)

If I've got the theory right here then you should understand that the "loan repayment" is NOT AN EXPENSE to the S-Corp and NOT INCOME TO YOU.  All of the activity recording a loan repayment goes on on the BALANCE SHEET, both the S-Corp's and yours.

It sounds like this is your first year of operation.  I'd strongly suggest that you go find a competent local CPA to help you with your first income tax returns, (1120S and Form 1040) so that you get off on the right foot. 

Tom Young

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