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18 / 05 / 2015 by Greg Freyman, CPA in Business Tax

Is Your Company At Risk For Having Loans Reclassified To Equity?

A bonafide “loan” from a shareholder to your company can turn into something much worse should it go unpaid. Even if there is a legitimate loan document detailing the interest, repayment schedule and other characteristics of the loan, it does not mean much when the terms are not enforced. There could be serious consequences as we explain below.

What happens if the loan isn’t repaid?

In these situations, the debt is generally reclassified to equity and any interest deduction taken is disallowed as per the court cases Roth Steel Tube Company v. Commissioner, 800 F2d 625 & Indmar Products Co., Inc., TC Memo 2005-32.

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