Yes, an S corporation can lend money to a shareholder, but the withdrawal must function as real debt rather than an informal owner draw. Document the principal, current interest rate, maturity date, payment schedule, approval, and bank transfers before funds move. If the transaction does not show a genuine repayment obligation, it can be treated as a distribution or compensation based on the facts. Owners evaluating S-corporation status should separately review election timing and the broader LLC-versus-S-Corporation decision. This page explains federal tax mechanics; it is not individualized legal or tax advice.
Yes. An S corporation may lend money to a shareholder when the transaction is genuine debt: the board approves it, a signed note sets principal, interest, maturity, and repayment terms, funds move through separate accounts, and the shareholder follows the schedule. Otherwise, tax authorities may reclassify the advance.
Create a written promissory note that identifies the corporation and borrower, principal, funding date, interest rate, compounding convention, payment dates, maturity, default terms, and any collateral. The board or authorized decision-maker should approve the transaction in written minutes or consent.
Transfer the advance from the corporate account to the shareholder account and make repayments in the opposite direction. Post the balance as a shareholder receivable in the corporation’s books; do not label the same payment as a loan in one record and a distribution in another. Evidence of repayment capacity and actual payments supports the stated debt treatment.
After funding, collect payments on the dates stated in the note, separate principal from interest, and reconcile the shareholder receivable at year end. If the borrower cannot follow the schedule, obtain tax advice before modifying, forgiving, or offsetting the balance. Lovie can organize formation records, entity details, and compliance events in one AI-native workflow, while a CPA or attorney evaluates the loan’s tax and legal treatment.
Section 7872 applies to corporation-shareholder below-market loans. For a term loan, the relevant Applicable Federal Rate is determined when the loan is made and depends on the term and compounding convention. Demand loans use the federal short-term rate for the applicable period.
The IRS publishes AFRs monthly, so a 2024 example should not be reused for a 2026 loan. Open the current IRS revenue ruling, select the short-, mid-, or long-term rate that matches the instrument, and document the source with the note. Section 7872 contains a limited $10,000 exception for certain corporation-shareholder loans, but it does not apply when tax avoidance is a principal purpose.
A purported loan that lacks real debt characteristics can be recharacterized according to its substance. If treated as a non-dividend distribution, the IRS states that the distribution is generally tax-free only to the extent of the shareholder’s stock basis. Debt basis is not used to determine the taxability of that distribution. An amount above stock basis can create capital gain.
Compensation treatment can create different payroll and income-tax consequences. The outcome is fact-specific, which is why owners should not use a shareholder-loan account as a permanent substitute for salary or distributions. Track stock basis separately from any amount the shareholder owes to the corporation.
Borrowing money from your S Corporation is permissible, but it requires strict adherence to IRS guidelines to avoid unintended tax consequences. When a shareholder takes a loan from an S Corp, it must be structured as a bona fide debt rather than a disguised distribution or salary. The IRS scrutinizes these transactions closely to ensure they are not used to bypass payroll taxes or distribute tax-free dividends.
To establish a legitimate loan, you must execute a formal written promissory note detailing the loan amount, a fixed maturity date, and a stated repayment schedule. Crucially, the loan must carry an adequate interest rate, typically matching or exceeding the Applicable Federal Rate (AFR) published monthly by the IRS. For instance, if the short-term AFR is 4.5%, your loan must charge at least this rate. Failure to charge adequate interest can result in the IRS recharacterizing the loan as a taxable distribution or compensation, triggering immediate tax liabilities and potential penalties. Additionally, the loan should be properly recorded in the corporate minutes and reflected on the company's balance sheet. Regular, documented repayments of both principal and interest are essential to demonstrate the loan's validity.
Confirm election timing and owner-payment rules in the Form 2553 S-Corp election guide.
Compare eligibility, payroll, distributions, and funding constraints in the LLC versus S-Corporation guide.
An S corporation shareholder loan is a documented debtor-creditor transaction between the corporation and an owner. Its tax treatment depends on bona fide debt evidence, the applicable federal rate, repayment conduct, stock basis, and consistent corporate records.
Shareholder advances must be distinguished from distributions, wages, and loans made by a shareholder to the S corporation.
Yes, if the advance is genuine debt supported by approval, a signed promissory note, a current interest rate, separate transfers, and actual repayment.
An undocumented or unpaid advance can be reclassified based on its substance.
Use the IRS rate for the month the loan is made, matched to the loan term and compounding convention.
AFRs change monthly; demand-loan and term-loan rules differ under Section 7872.
26 U.S.C. §7872 — Treatment of Below-Market Loans explains corporation-shareholder below-market-loan treatment and AFR mechanics.
IRS — S Corporation Stock and Debt Basis explains stock basis, debt basis, and distribution taxability.
IRS Revenue Ruling 2026-12 is a dated example of the monthly AFR publication; use the ruling for the actual loan month.
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