Identify the direction of the loan first. Money advanced by a shareholder to the company is not the same transaction as money taken by a shareholder from the company. Record who owes whom, how the funds were used and the commercial reason. Loans, compensation, capital contributions and distributions have different reporting effects. A year-end journal entry should reflect the transaction rather than invent its character.
Support debt with terms and conduct
A debt review considers documentation, interest, maturity, repayment ability and actual payments, among other facts. Below-market loans can raise additional tax questions. If a company pays personal expenses or provides funds without a credible repayment arrangement, constructive distribution or compensation treatment may be relevant. A signed note is useful, but ongoing conduct can undermine a document that is never followed.
Worked planning example
A shareholder receives $75,000 from the corporation to buy a personal asset. The books call it a receivable, but there is no repayment schedule and no payments over several years. Compare that file with a documented loan that has appropriate terms, scheduled repayment and evidence of payments. The label does not decide the outcome. The review should also consider whether the owner has the means to repay and whether interest reporting is handled correctly.
Records to bring to the review
- Document direction, amount and purpose.
- Review interest, maturity and repayment ability.
- Record actual payments and remaining balance.
- Check personal expenses and reporting consequences.
Can I avoid a dividend simply by calling the transfer a loan?
No. Tax treatment depends on the actual transaction and supporting facts, including whether genuine debt exists.
Read this alongside the AE book and published cases
This companion guide provides additional education for readers of C Corporation Tax Strategy. It is not a quotation or chapter excerpt. The worked example is hypothetical and should not be confused with a reported AE client outcome.
Use the AE Tax Advisors c corporation case-study collection to compare the assumptions and supporting records behind published reports. Reported results are publisher statements, not independently audited results or a prediction for another taxpayer. The case-study methodology explains those limits.
Primary source and next reading
IRS guidance for this topic. IRS publications can cover earlier return years; check applicable current-year instructions, law and state treatment before implementation.
Read the complete companion reading sequence or browse the existing learning library. For the broader loss framework, read how the 2026 excess business loss limitation works.
General federal tax education. Actual outcomes require complete facts, applicable law and a taxpayer-specific review. A deduction amount is not the same as tax saved or cash available.
Discuss your planning facts with AE Tax Advisors
Bring the records identified in this guide to a discovery conversation with AE Tax Advisors. Start with the decision you need to make, the year affected and the assumptions that need verification.