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Idaho C-Corporation Loaning to Shareholders

A Idaho corporation can lend money to a shareholder. However, the IRS will reclassify the loan as a dividend distribution if the loan is not well documented. The loan must be a bona fide one, with a written promissory note signed and dated by both the lender (the Idaho corporation) and the borrower (the shareholder). The promissory note should state the time period for repayment and the interest rate to be charged.

Idaho Interest Rate

The Idaho interest rate must be a reasonable one, based on current market conditions. However, if the principal balance of the loan does not exceed $10,000, the below-market interest rate rules will not apply. In fact, the Idaho interest rate can be as low as zero percent. This exception does not apply, however, if the principal purpose of the loan is to avoid Idaho federal tax. The IRS and the courts use the following criteria to determine if corporate loans to shareholder loans are really loans or should be treated as taxable dividend distributions:

  • Whether a ceiling existed on the amounts advanced
  • Whether or not security was given for the loan
  • Whether the stockholder was in a position to repay the loan
  • Whether there existed a repayment schedule or an attempt to repay
  • Whether there was a set maturity date
  • Whether interest was charged
  • The amount of the loan
  • The extent to which the shareholder controls the Idaho corporation
  • The earnings and dividends history of the Idaho corporation
  • Whether a promissory note was drawn up
  • Whether the Idaho corporation made systematic attempts to obtain repayment
  • The Idaho corporation’s ratio of debt to equity

Rent Payments for Shareholder’s Personal Property

A Idaho corporation can pay rent to a shareholder for the use of the shareholder’s personal property. The Idaho corporation gets a tax deduction for rent paid, and the shareholder reports rental income on his or her personal return. However, the IRS will reclassify rent as a dividend when payments are unreasonable. This may happen, for example, when a Idaho corporation pays rent to a shareholder over the fair market rental value of the property.