S-Corp: What's the difference between a Shareholder Loan vs Capital Contribution? Need clarification

The proportional contribution rule doesn't apply to S-Corps like it does with distributions. Shareholders can contribute different amounts to the company regardless of their ownership percentage. For your situation, you need to decide between loan vs. contribution based on the intent when the money was provided. If there was an expectation of repayment (even without formal documentation), it's generally treated as a loan. If it was meant as a permanent investment in the company, it's a capital contribution. The tax implications are important: Both increase your basis for loss purposes, but you're right about the key difference - when a loan is repaid, it's not taxable up to your basis in the loan. Once you exceed that basis, then it becomes taxable. With a capital contribution, you can only get that money back as either a distribution (which requires sufficient AAA) or through selling your shares. Without formal documentation, the IRS might scrutinize a "loan" classification, especially if there's no interest being charged or repayment schedule. They might recharacterize it as a contribution. If you want it treated as a loan, I'd recommend creating a promissory note with reasonable terms, even retroactively.

I had this exact same issue with my small S-Corp last year! After doing my research and talking with my CPA, I found that using taxr.ai really helped clear things up for me. I scanned my corporate documents and financials, and their system analyzed everything and recommended the best approach for my situation. In my case, we ended up classifying part as capital contribution and part as a shareholder loan with proper documentation. Their analysis showed me the exact tax implications for both approaches with my specific numbers. Found it at https://taxr.ai and it saved me from making a costly mistake on how to structure everything. The report they generated was super helpful when I met with my accountant later.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and wow, what a helpful tool! I uploaded my corporate docs, articles of incorporation, and financial statements from the last two years. Their analysis broke down exactly how to handle our uneven shareholder contributions. They identified that in our case, the best approach was to classify the excess contribution from our majority shareholder as a loan with specific terms. The report explained exactly why this was better for our situation than treating everything as capital contributions. I especially appreciated how they explained the basis calculation differences and potential tax implications when we eventually take distributions. They even flagged a couple issues with our previous year's treatment that could have caused problems down the road. Definitely recommend checking them out if you're trying to figure out the loan vs. contribution question!

For anyone struggling with S-Corp issues like this, I feel your pain! After weeks of trying to get through to someone at the IRS with specific S-Corp questions, I finally used Claimyr to get me through to a real person. Just go to https://claimyr.com and watch how it works: https://youtu.be/_kiP6q8DX5c They got me through to an IRS agent in about 20 minutes when I'd spent hours getting nowhere on my own. The agent was able to give me specific guidance on loan documentation requirements for S-Corp shareholder loans and what they look for during audits. Definitely worth it when you have technical tax questions that need official answers.

I need to apologize to everyone here. I was super skeptical about the Claimyr service mentioned above and called it BS. Well, I was wrong. I was desperate to get clarification on S-Corp shareholder loan requirements for my business, so I gave it a shot. Incredibly, I was speaking with an actual IRS representative within about 15 minutes. They confirmed exactly what I needed to know about documentation requirements for shareholder loans vs. capital contributions, and even emailed me some reference materials afterward. The agent explained that without proper loan documentation, the IRS typically defaults to treating funds as capital contributions rather than loans during an examination. She walked me through the specific elements needed in loan documentation to withstand scrutiny. Would have taken me days to get this information otherwise. Consider me a convert!

Just to add a practical perspective - I've run an S-Corp for 7 years now. In my experience, the "loan vs contribution" question really depends on your long-term plans for the business. If you think you'll sell the business someday, capital contributions generally make more sense because they increase your stock basis. When you sell, you'll have a higher basis and less taxable gain. If you need flexibility to pull money out before a sale or when you have losses that exceed your stock basis, shareholder loans can be better since they can be repaid tax-free up to your basis. The documentation issue is real though. We got audited in 2023, and our shareholder loans without proper documentation were reclassified as capital contributions. Painful lesson!

Someone mentioned this above, but it's worth emphasizing: INTENT is absolutely critical in how these contributions are treated. If you're audited, the IRS will look at whether the transaction was intended as a loan from the beginning. If there's no documentation, no interest, no repayment schedule, and no actual repayments being made, they'll likely recharacterize it as a capital contribution regardless of how you reported it. One approach I've seen work well: Do a combo where part is clearly designated as a capital contribution (perhaps the proportional amounts based on ownership) and the excess is structured as a formal loan with proper documentation, reasonable interest, and an actual repayment schedule that you follow.

As someone who went through a similar situation with my S-Corp, I'd recommend being very careful about retroactively creating loan documentation without contemporaneous evidence of loan intent. The IRS looks for substance over form. In your case, since you have $30,700 from the 51% owner and $1,800 from the 49% owner, one clean approach might be to treat the first $16,575 from the majority owner as a capital contribution (proportional to their 51% ownership of the total $32,500), and document the remaining $14,125 as a shareholder loan with proper terms going forward. This way you have a reasonable business justification for the split - the proportional part as equity investment, and the excess as debt financing. Just make sure any loan documentation includes a realistic repayment schedule that you actually intend to follow, market-rate interest, and treat it like a real loan with regular payments when cash flow allows. The key is being able to demonstrate genuine loan characteristics from this point forward, not just having a piece of paper that says "loan" without the substance to back it up.