Here's a capital idea: Make sure your C corporation is properly capitalized. In addition to legal issues, the amount you have invested in your company can play a role in determining how future loans are treated for tax purposes.
For example, say you put money in your business to fund an asset purchase. If there's no reasonably anticipated source for repayment to you, such as from expected future cash flow, you may be making a capital contribution instead of a loan.
What's the difference?
One tax benefit of having the funds you put into your company classified as a loan is the deduction of interest expense by your business. In addition, the checks the company writes to you to pay back the debt are considered nontaxable repayments of loan principal.
When your advance to your C corporation is classified as equity, withdrawals are generally considered dividends, which are not deductible on the business tax return, yet are taxable to you on your personal return.
Another difference between debt and capital contributions is the tax treatment if the business is unable to repay the loan. Uncollectible loans made to your company may be considered miscellaneous itemized deductions, which means you may not get full benefit of the loss. In contrast, uncollectible infusions of capital can qualify for treatment as an ordinary loss.
Investing in your company can be rewarding personally as well as from a tax standpoint. Please give us a call to discuss the best way to structure amounts you put into your company.