A simple fact of being the sole shareholder of a company, do not loan money between yourself and the company. Some owner’s from time to time will make incremental deposits between bank accounts (personal and business) and eventually it creates a mess.
When an owner lends money to a corporation, it does not allow the owner to take a long-term capital loss on his own personal income. Loans must be signed correctly with a promissory note, otherwise it is an informal deposit that can be seen as a violation of ethics. Furthermore, if a corporation makes payments beyond salary to the owner, the owner cannot claim that they are payments owed for unofficial loans. The IRS will decide that they are dividends which are taxable under ordinary income. Without credible notes to between the owner and the corporation, none of the loans were official, without official loans there can be no repayment, so any payment from the corporation to the owner is taxable income.
Additionally, it cannot be carried-forward for capital loss deduction because there cannot be a capital loss without an official note of the loan. Taxpayers’ must be careful when swapping funds between themselves and solely held corporations and businesses because it can end with paying substantial taxes to the IRS. There is a correct way to run a business, and most of this can be prevented with correct recordkeeping.
If you have questions about recordkeeping for your solely held business, contact us at the Center for Financial, Legal & Tax, Inc.