I would like to record the funds taken out by the owner in 2024 as Shareholder Draws. However, both the lead partner and the client want them recorded as a Loan to Shareholder on the S corporation’s books. The issue is that there is no written loan agreement, no stated interest, and no formal repayment schedule. While there are paycheck withholdings being applied toward the balance, the loan amount increased substantially during the year. If the lead partner instructs me to reclassify this as a Loan to Shareholder, how should I proceed?
I am leaning toward doing what they want, but documenting the lack of loan substantiation and offering to include a disclosure about it to the WP’s.
Posted by Alaska_Native246
1 Comment
That’s not pretty at all.
There is an article by Jeffry Quall out there about when it’s proper to memorialize an unwritten understanding. His thesis basically says it’s not backdating if the legal documents clearly indicate that the signature date is later than the intended origination date and that the document calls out that it is memorializing a prior arrangement. His position is that the IRS wouldn’t be misled because they can see all the facts they need to make their own determination if they want to respect the documents.
On your side, I think its good to have accurate workpapers that note the lack of legal documentation. (I mean, what interest rate are they going to charge? What’s the term?)
I’d also push for them to do at least a one page document to memorialize this.
Edit: Sorry, I believe its Kwall and not Quall.