TaxProTalk.com

I have an S Corp client with a loan to the corporation that has been growing each year. What usually increases the loan is that he doesn't actually write out a check to reimburse himself for out of pocket expenses. His comment is usually, "Well I don't really need the money." So it gets booked to the loan from shareholder account. That's usually a few hundred to maybe a couple thousand a year. There are, however, two good sized loans, each several years ago, to the corporation from personal funds to pay off outstanding debt. I'm thinking that since no effort is ever made to repay them, it might be best to re-classify them to APIC, and have a corporate resolution authorizing that. Is there any dastardly reason not to do so?

I think the question is why do it? It could tie his capital up and I really don’t see a need to do it at all.

I, generally, will encourage moving loans to APIC, especially when the s-corp is owned 100% by one individual. It removes the question of whether there is proper documentation of the loans and also removes any need to service the loan. Absent proper documentation and loan servicing dynamics, the IRS is likely to treat it as capital in an audit situation anyway.

Thanks Captain and Southpark. The larger influx of funds have been sitting here for quite some time, the client isn't concerned with those funds being tied up, and some of the reading I've done recently makes me think they would be better classified as APIC rather than a loan. I appreciate your input.