Arlington, MA asked in Tax Law for Massachusetts

Q: Can my C corp forgive a loan to myself?

I have a business that is set up as a C Corporation. Last year, I took a personal loan from the company of $10,000. Can the corporation forgive that loan as long as I show it as income on my personal return? It seems it might be looked at as a way to circumvent Social Security taxes. Is it better (or required) to pay myself and then repay the loan? Thanks.

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1 Lawyer Answer
D. Mathew Blackburn
D. Mathew Blackburn
Answered
  • Tax Law Lawyer
  • Englewood, CO

A: It creates a dividend when forgiven. You also add interest at a minimum of the applicable federal rate for the period.

Dividends are not subject to employment taxes, but they are taxed twice. Once at the corporate level and once a dividend. If you're trying to minimize taxes an S-election would likely work better.

I'd hire a tax attorney or a CPA to look at your situation and get some advice.

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