BORROWING FROM YOUR COMPANY CAN MEAN EXTRA TAXES

It’s not uncommon for a closely held corporation to pay for some of the personal expenses of its officer-stockholders.  On its balance sheet, the business treats such transactions as “loans to officers” which the stockholder owes the company.  Although some business owners think that this practice is to their advantage, it can ultimately result in unnecessary higher taxes.

Paul Page is a good example.  A natural salesman, Paul began his business career by putting his talents to work for a residential real estate broker.  From the beginning, he was a success.  When Paul showed a house to a buyer, it was only a matter of time until the “For Sale” sign was covered by a “Sold” sign.

But Paul’s ambition went beyond being a successful real estate salesman, for he had always dreamed of being in business for himself.  When he saw that his reputation was attracting more and  more real estate listings for his employer, Paul knew the time was right to turn his dream into reality and Page Properties, Inc. was born.

The company was an immediate success and generated enough income to pay Paul an annual salary of $90,000 and still show a healthy profit.  In addition, the business paid an average of about $20,000 a year for some of Paul’s personal expenses.  The corporation classified these payments as “loans to officers: and Paul paid a portion of them back to the company each year.

For the taxable year ending December 31, 2007, Page Properties, Inc., reported taxable income of $80,000 and paid $15,450 in federal corporate income tax.  Paul also filed his personal 2007 individual income tax return and made his annual contribution to the IRS on his $90,000 salary.  By the end of 2007, the amount that Paul owed his company for its payment of his personal expenses was $20,000.  However, since the company treated it as a loan to officers, Paul felt comfortable that it wasn’t taxable income to him.