How are S Corp loan repayments handled for tax purposes?

This is helpful, but I'm still a bit confused. If the loan payments reduce the cash available to the business each year, won't that affect what's available to distribute to shareholders? And if I'm taxed on profits regardless of distributions, doesn't that mean I could potentially owe taxes on money that's being used to pay down the loan principal?

Yes, the loan payments will absolutely reduce the cash available for distribution to shareholders. This is an important cash flow consideration, but it's separate from the tax treatment. You're exactly right about potentially owing taxes on money being used to pay down principal. This is one of the key challenges of S Corp ownership. Since S Corps are pass-through entities, you'll be taxed on your share of profits regardless of whether you actually receive that money as a distribution. So if the business earns $100k in profits but uses $50k to pay down loan principal, you'll still be taxed on the full $100k. Many S Corp owners ensure they distribute at least enough to cover the shareholders' tax obligations.

Did they actually give you advice or just analyze the documents? I've looked at other AI tax tools before and they just spit out generic info I could find on Google.

How does it handle the basis calculations? I've heard S Corps can get tricky with loans because you need to track your basis carefully, especially if the corporation has losses.

They definitely provided specific advice based on my situation, not just generic info. The analysis included recommended accounting entries for my bookkeeping software and specific tax planning strategies tailored to my business structure and loan terms. For basis calculations, that's actually one of the areas where they really helped me. The system tracks your initial investment, increases from profits, decreases from distributions, and adjustments from loans. It flagged potential issues with my basis that could have caused problems during an audit, especially since I was projecting some losses in year one as we ramped up.

How does this even work? The IRS phone system is basically designed to make you give up. I've tried calling dozens of times for a somewhat complicated S Corp question.

Sounds like marketing BS to me. Nobody can get through the IRS phone tree, especially for complicated business tax questions. Even if you do, most agents just read from scripts and can't handle S Corp specifics.

The service works by using their system to navigate the IRS phone tree for you. They keep trying different menu options and waiting on hold so you don't have to. When they finally get a human, they call you and connect you directly to that person. It's not magic, just persistence and technology. I was definitely skeptical too, but I was desperate after trying for weeks on my own. I did eventually get connected to a senior agent who handled S Corp tax issues specifically. Not all agents know everything, but the person I spoke with clearly understood S Corp loan treatments and walked me through the proper basis adjustments I needed to make.

Can you explain the difference between asset vs stock purchase a bit more? The seller originally wanted to do a stock sale but my attorney pushed for asset purchase. Is there a big tax difference?

With an asset purchase, you're buying the individual assets of the business rather than shares of the company. This is generally much better for buyers tax-wise because you get to "step up" the basis of the assets to their fair market value, even if the seller had them at a much lower basis. This higher basis means more depreciation/amortization deductions for you going forward. For a digital business, you'd allocate the purchase price across the acquired assets - maybe some equipment, software, customer lists, non-compete agreements, and goodwill. Each may have different depreciation/amortization schedules. With a stock purchase, you're stuck with the seller's existing (likely lower) basis in the assets, which means smaller future deductions. Your attorney was right to push for an asset purchase - it's almost always more tax-advantageous for the buyer.

But Section 179 only applies to tangible property, right? OP mentioned it's a digital e-commerce business so there might not be much tangible property to deduct.

You're absolutely right about Section 179 being limited to tangible property. For a digital e-commerce business, the qualifying assets would be pretty limited - maybe some computer equipment, office furniture, or servers if they're purchasing any physical hardware. Most of the value in a digital business (customer lists, software, goodwill, etc.) would need to be amortized over longer periods instead of getting the immediate Section 179 deduction. That said, @e7050d380bc7 should definitely do a detailed asset allocation with their CPA to maximize whatever immediate deductions are available, even if Section 179 options are limited.

This is excellent comprehensive advice! I'm actually in a similar situation with an S Corp acquisition and hadn't thought about the Form 8594 requirement. Can you clarify - does the asset allocation need to be finalized at closing, or can it be adjusted later if we discover the initial estimates were off? Also, regarding the separate tax savings account, what percentage of monthly profits would you typically recommend setting aside for quarterly payments? I'm trying to avoid the cash flow squeeze that @b6a54621eac7 mentioned earlier.