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Money You Loan to Your Corporation
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Are there any income tax problems if I loan money to my corporation?
YES Loans between related parties must have a minimum interest rate (the Applicable Federal Rate or AFR). (There are exceptions.) If the rate is less than the required minimum rate, the IRS will impute interest. That will result in unintended tax consequences. Loans from a shareholder to a corporation that are not documented by promissory notes (the five essential elements must be present), a security agreement, and documentation in the corporate record book can be more of a problem. The IRS can claim the advance is a capital contribution, not a loan. If the IRS succeeds, repayments of the "loan" could be classified as dividends. In Estate of Frederick R. Hoffman (2001-1 USTC 50,401; U.S. Court of Appeals, 4th Circuit) the Court sided with the Tax Court, finding the advances were loans, not capital contributions, even though there was no documentation and no interest was charged. The corporation did report them on its books as loans. The Court did find that interest had to be imputed on the loans.
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