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bharris8358
Returning Member

I have a C corporation and I loaned it $7,000 in 2017 and the corporation had a loss in 2017 and m years prior - Can I write of the $7,000 off in my personal return? any

 
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JulieH1
New Member

I have a C corporation and I loaned it $7,000 in 2017 and the corporation had a loss in 2017 and m years prior - Can I write of the $7,000 off in my personal return? any

It depends.  

If a shareholder's loan to a corporation becomes worthless, the debt must be considered bona fide to qualify for a bad-debt deduction [Reg. 1.166-1(c)]. To be considered a bona fide debt, the loan must meet demanding standards, especially when the shareholder is considered a related party. 

Factors that the courts consider in determining whether a bona fide debt exists as a result of a transfer between related parties include: 

1. The presence or absence of documentary evidence of the transaction (such as an executed note); 
2. Whether there is a fixed schedule for repayment (including a maturity date); 
3. Whether interest is being charged on the outstanding debt; 
4. Whether collateral is obtained or requested; 
5. Whether demand for repayment is made; 
6. Whether any repayments have been made; 
7. Whether the transaction is reflected as debt in the records of the parties; and 
8. The financial condition of the debtor at the time of the loan (so that the lender can show the expectation of repayment and intent to create a valid debtor-creditor relationship). 

To preserve a bad-debt deduction, and support the fact that a true debt exists, shareholder loans to a corporation should always be represented by a formal note. The note should bear a fair rate of interest and should be authorized in the corporate minutes. 

If the corporation had no ability to borrow from a bank, the IRS may consider the "loan" to the corporation an investment or equity interest if the above 8 steps cannot be met.

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1 Reply
JulieH1
New Member

I have a C corporation and I loaned it $7,000 in 2017 and the corporation had a loss in 2017 and m years prior - Can I write of the $7,000 off in my personal return? any

It depends.  

If a shareholder's loan to a corporation becomes worthless, the debt must be considered bona fide to qualify for a bad-debt deduction [Reg. 1.166-1(c)]. To be considered a bona fide debt, the loan must meet demanding standards, especially when the shareholder is considered a related party. 

Factors that the courts consider in determining whether a bona fide debt exists as a result of a transfer between related parties include: 

1. The presence or absence of documentary evidence of the transaction (such as an executed note); 
2. Whether there is a fixed schedule for repayment (including a maturity date); 
3. Whether interest is being charged on the outstanding debt; 
4. Whether collateral is obtained or requested; 
5. Whether demand for repayment is made; 
6. Whether any repayments have been made; 
7. Whether the transaction is reflected as debt in the records of the parties; and 
8. The financial condition of the debtor at the time of the loan (so that the lender can show the expectation of repayment and intent to create a valid debtor-creditor relationship). 

To preserve a bad-debt deduction, and support the fact that a true debt exists, shareholder loans to a corporation should always be represented by a formal note. The note should bear a fair rate of interest and should be authorized in the corporate minutes. 

If the corporation had no ability to borrow from a bank, the IRS may consider the "loan" to the corporation an investment or equity interest if the above 8 steps cannot be met.

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