Correct. You cannot enter loans by shareholders to an S corp as income and then deduct it later as a loan, and the principal isn't deductible.
When determining the taxability of a non-dividend distribution, the shareholder looks solely to his/her stock basis (debt basis is not considered).
For loss and deduction items, which exceed a shareholder's stock basis, the shareholder is allowed to deduct the excess up to the shareholder's basis in loans personally made to the S corporation. Debt basis is computed similarly to stock basis but there are some differences.
If a shareholder has S corporation loss and deduction items in excess of stock basis and those losses and deductions are claimed based on debt basis, the debt basis of the shareholder will be reduced by the claimed losses and deductions.
If an S corporation repays reduced basis debt to the shareholder, part or all of the repayment is taxable to the shareholder.
Keep in mind:
- A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder's personal return. It is a long-term capital gain (LTCG) if the S corporation stock has been held for longer than one year.
See Corporation stock and debt basis for more information.
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