Reporting shareholder loan as loss

[kc123]

Hi,

I was the founder of a Delaware C-corporation and in 2022 I have loaned the company $25000 as a shareholder loan. The company did not take off as expected and I have recently dissolved the company in 2023. The original $25000 that I have provided as a loan and the interest on that loan was not paid by the company.

When I file my 2023 taxes, I assume I can deduct the losses I have incurred by this loan. Can I deduct the loss from my income for 2023? or should it be deducted as a capital loss?

Thanks!

[tagteam]

I'm going to page @Rick19744 for input here.

[Rick19744]

A few questions:

• How was the corporation capitalized?  $$ amount
• How were the loan proceeds used?
• Was there a true loan agreement between the corporation and the shareholder, including stated interest?
• Was any of the loan repaid?
• Did you file a 2022 C corporation tax return?
• Any liquidating distributions in 2023 when dissolved?

[kc123]

Hi @Rick19744 ,

Thanks for your help. Here are my responses.

• The $25000 loan was used to fund the corporation.
• The loan proceeds were used for business expenses (COGS, general admin expenses)
• Yes, there was a loan agreement with interest rate specified.
• No, the loan was not repaid.
• We are in the process of filing the final tax return for dissolving the corporation.
• There won't be any distributions.

[Mike9241]

apparently no amount was put in as permanent captal to fund the corportion for at least one operating cycle. that portion the IRS may deem to be stock in which case it's a capital loss - short-term or long-term dependiing on date money was put in and date corporation was dissolved.  apparently the interest was never paid and you never reported it as income. I would think the IRS wpould disallow any interest deduction (and you wouldn't have any interest income) for the portion it deems permanent capital.  Any portion not demed permanent capital if more tha $10K would be subject to section 7872 imputed interest rules that would require you to report the interest income even if you didn't receive it. Then there is the issue of the corporation of not repaying the debt. the IRS has issued several conflicting pronouncements as to wether that is forgiveness of debt generating income for the corporation.  Your situation is complex and I don't think anyone in this forum with the limited info can give you definitive answers on the issues. You may want to seek the advice of an outside tax pro becuase  they can look over the operations of the Corp and see what you did? they can ask questions they deem eelevant to give you the best advice they can. 

[Rick19744]

Thanks for the response to the questions:

• I agree with @Mike9241 in that there is limited information regarding the business.
• It does not appear, based on your reply, that there was not any capital contribution; possibly minimal?
• Based on the lack of capital, I believe the IRS would take the position that the entire $25,000 was a capital contribution, and as a result, would be a capital loss.
• As noted by @Mike9241 , LT vs ST capital loss would depend on the applicable dates; formation of the business and the end of the business.
• Could less than the $25,000 be considered capital?
  • Yes.  But given the limited facts, it is hard to say.
  • Even if less is deemed capital upon audit, there are the other issues that would need to be considered; imputed interest and cancellation of debt at the corporate level (which is income), etc.
  • Obtaining additional facts for this situation is not best served in a forum such as this.
• I would also recommend a discussion with a tax professional.