My company has "loaned" an officer funds under a promissory note. This has accumulated and the company is now doing well enough to pay him a salary. Is there any way to reduce the promissory note without having to have him pay it with after
Loans To Employees - Officer Accounts Receivable
Answers
You could forgive the loan over time; the officer would pay the tax on the forgiven part, but would not be out of pocket.
Your quotes around "loan" are obviously deliberate, and I can assure you that you want to get ahead of this before the IRS does. They do not take kindly to schemes designed to defer income taxes, FICA, etc. to later periods, on constructive receipts of cash through salaries disguised as loans, whether through forgiveness or otherwise.
I know of a company where the CEO did exactly the same thing. He now owes the IRS a large six-figure sum on such "loans", a lot of which is penalties and interest. Oh yes, he is also now serving 13 years for other fun and games within the company.
If there was a way to answer your question, I would not go on the record with it. And I would likely not stay around as the
I agree with Lee. Dangerous game... What you could do is tack on another $x in salary and then take that amount and reduce the loan each year. He would be responsible for the income taxes though. I assume he is well past the FICA levels, so basically he will be out of pocket for the income taxes. You can do the same thing with a cashless bonus. Both are "nothing out of pocket", but has the same impact as if he got the cash and paid it off at arms length.
For all the reasons cited above, we suspended and then barred any officer loans. There is no way to avoid the tax consequences and get a clean audit.
No. Debt forgiveness saves the company cash, but creates taxable income for the owner, who may need cash to pay taxes. You missed a chance to to use deferred compensation originally, although there are distribution restrictions to liability distributions.
It has been a long time since I worked as a tax
I guess I am a bit offended by the idea that anyone should think that he/she SHOULD be able do so: the idea that highly compensated executives should be entitled to tax-free compensation when ordinary workers are not.
Off my soapbox now -- I suggest that quite possibly, this "loan" should have been treated as compensation in the year received, and that potentially, the company could be at
If I were CFO, I think I would insist that it be repaid now, even if that means declaring a bonus, and then applying the bonus toward the repayment of that loan. I also might want to consult with an attorney for advice concerning the company's, and my own, legal exposure in the matter.
I used to work in the tech sector and it used to be common to provide payments with a promissory note that was eventually forgiven. We used to put the "forgiven" amount in the person's W-2 and be done with it. As the others mentioned, it is a good idea to stop this as the IRS frowns on this type of deferred compensation. I would put the entire amount in his W-2 or have him pay it off.
Don't forget to make sure that the Promissory Note has an interest rate that could be defended, i.e. tied to some measure to show that it's not an interest free loan, even if its tied to a passbook savings interest rate.
Wayne's point is very important here (so backing it up). If the note is long lived at all, the lack of a market interest rate could trigger problems. I can't predict what those will be, but as Robert, Patrick et al point out, the Deferred Comp hole is not one you want to discover the depths of.