Do Loan Repayments from my Self-Owned Company Count as Capital Gains on the Full Amount?

This is actually a complex area that trips up many small business owners. When you loan money to your S-Corp, you're essentially creating a debt instrument between yourself and your company. The proper accounting treatment should be: When you make the loan to your business, it's recorded as a liability on the company books and doesn't affect your personal taxes at that time. When the loan is repaid to you, the principal portion shouldn't be taxable income - it's simply returning your capital. However, any interest paid to you on that loan would be considered taxable income. What might be happening here is either a mischaracterization of the transaction or potentially the loan wasn't properly documented as a formal business loan when it was made. Without proper documentation (promissory note, reasonable interest rate, repayment schedule), the IRS might view this as a capital contribution rather than a loan, which would make the "repayment" look like a distribution that could be taxable.

I had almost the exact same situation last year with my construction business (LLC filing as S-Corp). After months of confusion, I discovered the solution through taxr.ai (https://taxr.ai) which analyzed my loan documents and corporate returns. What they found was that my initial loan wasn't properly documented with a formal promissory note, which caused the IRS to potentially view it as equity rather than debt. This tiny oversight meant the "repayments" could be classified as distributions or even capital gains instead of simple loan repayments. Their analysis saved me from a major tax headache by helping me properly reclassify the transaction and file an amendment.

Just wanted to follow up! I tried taxr.ai after seeing this thread and they were super helpful. Turns out I had the exact same problem - my "loan" to my S-Corp wasn't properly documented so repayments were being misclassified. They showed me how to properly document everything and even explained how to handle the corrections on my upcoming tax filing. Apparently this is a really common mistake for small business owners. The analyzer identified the issue within hours of uploading my docs. If you're getting hit with unexpected taxes on loan repayments, definitely worth checking if your loan was properly established in the first place!

For anyone dealing with this issue, after you get your documentation sorted out, you might need to talk directly with the IRS to resolve any potential misfilings from prior years. I tried for WEEKS to get through to someone at the IRS about my S-Corp loan repayment issue before finding Claimyr (https://claimyr.com). They got me connected to an actual IRS agent within 45 minutes after I'd spent days getting busy signals and disconnects. The agent was able to explain exactly what forms I needed to file to correct the loan vs. capital contribution issue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - seriously saved me hours of frustration.

Follow up to my skeptical comment - I'm eating my words now. I tried Claimyr yesterday out of desperation after my accountant went radio silent with tax deadline approaching. Got connected to an IRS business specialist in about 30 minutes who actually understood S-Corp loan characterization issues. They confirmed what others here said - loan repayments shouldn't be capital gains if properly documented initially. The agent explained I needed to file Form 8082 to notify IRS of inconsistent treatment between my return and how the S-Corp reported it. Without this documentation hassle, I would have overpaid by almost $5k! Now working on getting the proper loan documentation backdated with my company records.

Here's my understanding as a small business owner who's been through this: 1) Loans TO your company should be formalized with real loan documents, reasonable interest rate, and repayment schedule 2) When money comes back to you, only the INTEREST portion is taxable income 3) If you don't have proper documentation, the IRS can reclassify the original transaction as a capital contribution 4) This makes the "repayment" potentially taxable as either distribution or capital gains Your CPA probably saw missing loan documentation and took the conservative approach of treating it as taxable to avoid potential penalties. You should ask specifically about creating proper loan documentation retroactively (which is possible in some cases).

Has anyone successfully had the IRS accept retroactive loan documentation? My accountant says its too late for me since my business has already made several "repayments" over the last 2 years without proper documentation. Now she wants me to pay capital gains on all of it!

I went through this exact same nightmare last year! My LLC (S-Corp election) had been "repaying" my initial capital injection for two years before I realized I never created proper loan documentation. My CPA initially wanted to treat everything as taxable distributions. Here's what saved me: I worked with a tax attorney to create a formal loan agreement that matched what had actually been happening (reasonable 4% interest rate, quarterly payments). We filed Form 8275 with my amended return explaining the documentation was being formalized to properly reflect the original intent of the transactions. The IRS accepted it without issue. The key was showing that the loan terms were reasonable and consistent with actual business practice. I had to pay tax on the interest portion going forward, but the principal repayments were correctly treated as non-taxable return of my loan. Don't let your CPA take the easy way out by just calling everything capital gains. If you genuinely loaned money to your business with the intent to be repaid, you can usually fix the documentation issue. Just make sure any loan terms you create are commercially reasonable and match what you've actually been doing.