While the facts and history are limited, I will provide some comments:
- I believe the debt should most likely be reclassified as capital.
- There are many factors involved, but given you are dissolving the S corp and have a shareholder loan, this appears to make sense.
- Make sure you adjust your shareholder basis schedule for the increase in capital
- This now just becomes part of the computation on gain or loss on liquidation of the S corporation
- The whole issue of debt vs equity in small corporations is a hot issue, so the above is taking the position that this should have most likely been a capital contribution from the beginning.
- Depending on the facts, if this was truly a loan, with an agreement, stated interest and actual repayments, then the S corp would have cancellation of debt income which would be passed out to you; the sole shareholder. Then there would be the offset of a bad debt at the 1040 level, but this, depending on the facts, may be a hurdle to climb.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
