C Corporation president/owner student loan

[Nancy Qui]

Can the corporation pay the owner student loan? If yes, how would that be treated on the corporation, and is that the limit amount? If not, the amount that paid for owner's student loan from corporation reflect on which account? Should it be shareholder loan? Any helps would be appreciated. Thank you.

[Opus 17]

The C-corp can add the student loan payments to the president's salary, where it will be subject to tax withholding, social security, medicare, unemployment tax, and all other good things.  Just as if it was an increase in salary or a bonus.

What you are really asking (I think) is can the repayment be tax-free?  For this, see publication 15-B on fringe benefits.

https://www.irs.gov/publications/p15b

Any educational assistance program must be in writing and must not discriminate.  For example, it might apply to all full-time employees, or all full time employees with more than 2 years of service.  But it can't be constructed so that the person you want to help just happens to be the only person who qualifies.  In addition, it can't favor officers or highly compensated employees.  Specifically,

Educational assistance program.

An educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only if all of the following tests are met.

• The program benefits employees who qualify under rules set up by you that don't favor highly compensated employees. To determine whether your program meets this test, don't consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.

• The program doesn't provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.

• The program doesn't allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.

• You give reasonable notice of the program to eligible employees.

The exclusion amount is up to $5250.

So if there is one owner (100% shareholder) they would have to pay out at least $105,000 in tuition and loan assistance to other employees in order to qualify for their own exclusion of $5250.

[guywong · Accepted solution]

Yes and No.  Any personal expenditures paid by a corporation on behalf of its CEO becomes compensation reportable on the W-2 form.  Since the corporation is a "C" corp, make sure the loan payments don't cause any "excess compensation".  Excess compensation becomes non-deductible constructive dividends.  My recommendation is to increase the CEO's wages and have the loan payments paid from the CEO's personal checking account.  No reason to commingle funds.  Just make sure the total wages are reasonable.

https://www.thetaxadviser.com/issues/2017/may/identifying-constructive-dividends-shareholders.html

Payments made to others for the personal benefit of the shareholder: Payment by a corporation of expenses of a shareholder without expectation of repayment can result in constructive dividends (Estate of Sell, T.C. Memo. 1992-430; Gow, T.C. Memo. 2000-93, aff'd, 19 Fed. Appx. 90 (4th Cir. 2001)). Such dividends are income to the shareholder but are not deductible by the corporation. Corporate payments for shareholder expenses have also been deemed to be additional compensation to shareholders (Ghosn, T.C. Memo. 1995-192).

If the corporation is paying a shareholder's expenses, the shareholder and the corporation should determine if the corporation could treat the payments as compensation that it can deduct. However, treatment of the payments as compensation subjects them to payroll taxes. Alternatively, the shareholder could set up the payments as a valid loan. In that instance, the corporation could not deduct the payments, but the shareholder would not report them as income.

Excessive compensation: Amounts paid to a shareholder in excess of what is considered reasonable may give rise to a constructive dividend. This may include not just salary but also directors' fees.

[Nancy Qui]

I appreciate for your reply. 

[Nancy Qui]

Thank you for your answer.

[Mike9241]

@Nancy Qui Also, the Corporation paying the student loans regardless of whether they're treated as compensation or loans would mean the interest portion paid on the student loan would not be deductible by either you or the corporation. If treated as compensation the interest portion of the student loan payment would be included.  As loans, If the interest rate is below market rate you and the corporation would be subject to the imputed interest rules of IRC 7872.  This means you would have interest income and the corporation may or may not be entitled to the deduction for the interest.