Understanding Tax Implications of Loan to C-Corp Shareholder - Need Guidance

Thanks for the explanation, but I'm still confused about the basis part. Let's say my basis in the stock is originally $5K. Does that mean I can take $10K as a dividend from E&P, then another $5K as return of capital (not taxed), and anything beyond would be capital gains? And do I need to formally dissolve the corporation or can I just keep it inactive?

Yes, that's correct about the basis. If your original basis is $5K, you can take the $10K as a dividend from E&P (taxed at dividend rates), then take up to $5K as a return of capital which isn't taxed but reduces your basis to zero. Anything beyond that would be treated as capital gains. Regarding dissolution, you don't absolutely need to formally dissolve the corporation, but there are several good reasons to consider it. Keeping an inactive corporation often means continuing to file returns and possibly paying minimum state franchise taxes or fees. A formal dissolution provides a cleaner end to the entity and can establish a definitive point for final distributions. If you're essentially done with operations, dissolution is usually the cleaner approach from both a legal and tax perspective.

How exactly does that work? Does it just look at your docs and tell you what's wrong or does it actually help fix the issues? I'm in a situation where I've got loans going back and forth with my C Corp and I'm worried I've messed up the documentation.

Sounds like snake oil to me. How would an AI know tax law better than an actual accountant? Especially for something as specific as C Corp distributions and loan repayments. Did it actually stand up to IRS scrutiny or are you just assuming it worked?

It analyzes your documents and identifies potential issues, then provides specific guidance on what needs to be fixed. In my case, it found that some of my "loans" lacked proper documentation like promissory notes and repayment schedules, which could have led the IRS to reclassify them as dividends. It then generated the templates I needed to properly document everything. For your skepticism, I get it - I was hesitant too. But it's not replacing accountants; it's using AI to spot issues a human might miss when reviewing hundreds of pages of corporate docs. And yes, it did stand up to scrutiny - I had a follow-up inquiry from the IRS about my distributions, and the documentation I created based on the platform's guidance satisfied their questions without any additional assessment.

How does that even work? The IRS never answers their phones - I've literally spent days on hold. Are you saying this service somehow jumps the queue or something?

This sounds like complete BS. There's no way to "skip the line" with the IRS. They're notoriously understaffed and overwhelmed. No legit service could get you through faster than anyone else. I bet they just keep calling on your behalf which you could do yourself.

It uses an automated system that navigates the IRS phone tree and stays on hold for you. When an actual agent picks up, you get a call connecting you to them. It's not skipping the line - you're still in the same queue as everyone else, but you don't have to waste hours with your phone to your ear. You absolutely could do this yourself if you have hours to sit on hold. For me, I was trying to run a business while dealing with this C Corp wind-down, and spending 3-4 hours on hold just wasn't feasible. After I got connected, the agent was able to pull up my records and confirm that my loan documentation was sufficient to treat the payments as loan repayments rather than dividends, which saved me thousands in taxes.

What exactly counts as "proper documentation" for a shareholder loan? I've just been keeping track in QuickBooks but don't have formal paperwork. Is that going to be a problem?

QuickBooks entries alone definitely won't cut it for shareholder loans. You need formal documentation that shows the loan was treated like a real arm's-length transaction. This includes a written promissory note with specific repayment terms, a reasonable interest rate (at least the applicable federal rate), and evidence that you've been following those terms with regular payments. The documentation should be dated properly (backdating is a red flag) and ideally there should be corporate minutes showing board approval of the loan. Remember, the IRS scrutinizes related-party transactions closely because they know it's tempting to disguise distributions as "loans" to avoid dividend treatment. If your documentation is lacking, it's not too late to clean things up - just don't backdate anything!

I dissolved mine last year. The key is planning the timing. If you can, try to generate some legitimate business losses in the final year to offset the retained earnings before dissolution. Also, make sure your loan documentation is rock solid if you want any distributions treated as loan repayments. I ended up paying dividend tax on about half of what I would have without planning.

This is really helpful about the accumulated earnings tax - I hadn't even considered that aspect! Quick question about the phased approach you mentioned. If I spread the distributions over multiple years, does that reset my basis calculations each year, or do I need to track the cumulative basis reduction across all the distribution years? Also, are there any minimum distribution requirements once you start the wind-down process, or can I really control the timing as much as I want?

Great question about the phased approach! Your basis reduction is cumulative across all distribution years - you don't get to "reset" it annually. So if your initial basis is $5K and you take $3K as return of capital in year 1, your basis drops to $2K for year 2 distributions. Regarding timing control, there generally aren't minimum distribution requirements for C Corps in wind-down mode, which gives you flexibility. However, be careful not to drag it out too long - the IRS could question whether you're truly winding down if the process stretches over many years without legitimate business reasons. One strategy I've seen work well is taking the loan repayments first (since those aren't taxable), then spreading the E&P distributions over 2-3 years to manage your tax brackets. Just make sure you maintain proper corporate formalities throughout the process and document the business reasons for your timing decisions. State requirements may vary, so check your state's rules about inactive corporations and any ongoing filing obligations. @76a129710797 mentioned the accumulated earnings tax - that's definitely something to watch if you're sitting on significant retained earnings without clear business justification for keeping them in the corp.

This is really smart advice about the timing separation! I'm actually dealing with a similar situation right now and was planning to do both transactions in the same month, but you're absolutely right that it could raise red flags with the IRS about substance over form. Quick follow-up question - when you mention waiting "a quarter or two" between transactions, is that based on any specific IRS guidance or just best practice from your experience? I'm trying to balance the timing strategy with my cash flow needs since I do need access to these funds relatively soon. Also, regarding the personal holding company tax you mentioned - what's the threshold for passive income that would trigger those rules? My C Corp has been mostly dormant but does have a small amount of rental income from some equipment we lease out.