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Maximum Interest Allowed on a Business Loan

From the IRS' perspective, what is the maximum interest rate allowed on a

loan from a person to a C or S Corporation?

If the loan interest rate exceeds the amounts allowed under State usury laws, is this something the IRS will try to enforce? Or is the only risk of such a loan from an audit by the State tax authorities? If the loan is between friendly parties, I have a hard time understanding whether there would be any enforcement of usury laws.

If you want to avoid the hassle of executing separate loan documents for any incremental loans between the two parties, can you just execute one document that extends a line of credit that is for an amount larger than the sum of the individual loans? If such a line of credit document exists and meets the various tests for being a legitimate loan document, will this do away with the need for further documentation each time a check is written from the person to the corporation? Perhaps the check memo could reference the "LOC Dated 9/9/2099"?

nish

Reply to
nish
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"nish" wrote

The IRS would allow deductions for interest that is obviously business related, but tey also look at the loan from the "ordinary and necessary" standards and in the case of related "friendly" parties, they'd look at reasonableness. 15 - 20% with a credit card company is one thing. 20% with a related party might be something else entirely. If banks are loaning (a big IF these days) at 8%, then a loan with a family member or business associate shouldn't be much greater than that.

They'd also look at the economic substance of the loan transaction to see if there is intent to shift, defer or otherwise evade taxes. If I gave my grandchild $12,000 and then borrowed that amount from her at say, 24% interest, they'd have things to say about it.

Reply to
Paul Thomas, CPA

The IRS looks skeptically at related party loans. So who is a related party? Answer: for openers, it includes you, your family, your nefarious relationships, your business partners, and people to whom you money outside of the Corp receiving the loan.

The simple question is "Why would an economically rational person borrow at a interest rate higher than the nominal rate at which he could borrow?"

So on audit, the IRS will most likely question the substance of high interest rate loans and may allocate the excessive interest as income to the Corp and as dividends to the lender.

Dick

Reply to
Dick Adams

"nefarious"!!!

relationships, your business

please elucidate as to what constitutes such. common law wife? POOSLT? POSSLT?

(grin)

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

The term "nefarious" was intended to include both extra-marital affairs and co-conspirators.

Common-law spouse has a legal definition. The Census Bureau term is POSSLQ (pos ul Q) or "Persons of the Opposite Sex Sharing Living Quarters". OTOH an extra-marital affair is a PSJ (Periodic Shack Job). ;)

But in the end, a related party is whomever the IRS says it is - unless and until a judge says different.

Dick

Reply to
Dick Adams

And, as the saying goes, once a mother-in-law, always a mother-in-law.

Once someone is a related party, that person stays a related party even if there's a death or divorce. Once a m-i-l, always a m-i-l.

Reply to
Arthur Kamlet

Unfortunately that is true. It is also the reason that, in my next life, I will only marry orphans.

That is an excellent point. But, it should be noted that there is nothing per se improper with related party loans. It is just that they are an opportunity for fraud and the IRS is expected to view them with a jaded eye.

Dick

Reply to
Dick Adams

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