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Posted by Tony Cox on December 8, 2006, 2:45 am
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> Tony's idea is another route I didn't think of. She could
> consider the money taken out of the corporation as a loan.
> She will have to repay this to the corporation. When she
> repays it, for example in December, the corporation can then
> turn around and pay out a salary in the same amount. Because
> the salary is all paid out in December, there will be no
> past penalties for not filing quarterly payroll taxes. Those
> payroll taxes can all be sent in this month. This route will
> also save having to do a lot of past paperwork. The income
> and employment tax burden will still be the sme however.
>
> Note that if she never intends to pay back the loan, the
> Code prevents it as being classified as a "loan" on the
> Corp's taxes and she must take it into income on her 1040.
> And in that case we would be back to page one. The Code
> requires a clear indications that it is a loan with the
> intent of being paid back. For example, there must be a
> stated interest rate, a stated payback period, and so on.
> What is a loan and what isn't has volumes of complicated
> case law lurking in the background. But in summary, she must
> have the intent of paying back the loan.
If she is really "small", so that the loan is never larger
than $10K, I think this counts a "de minimus" and no
interest needs be paid. Isn't that right? Otherwise, the
interest rate ought to be "reasonable" in case anyone
questions it. Having corporate minutes documenting
the loan prior to any draw wouldn't be a bad idea
either.
I always remember the words of my CPA-mentor
when setting up my businesses. You guys will hate
this, but here goes. "No one is 100% honest", he'd
say. "Lets be 98% honest and see how far that gets
us". Here, hidden in that 2%, are the post-dated
corporate minutes and the cavalier distribution of the
funds in the first place. But with no requirement to
file a return on the loan, its between her and God,
who will no doubt be far more forgiving than the EDD.
tc
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