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2018-2019 Tax Planning Guide
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The Tax Implications of Being a Winner
Owners of closely held businesses sometimes need to advance their companies money to bridge a temporary downturn, provide extra cash flow for an expansion or major expense, or other purposes. Should you classify those advances as bona fide debt, additional paid-in capital or something in between? Under U.S. Generally Accepted Accounting Principles (GAAP), the answer depends on the facts and circumstances of the transaction.
The proper classification of shareholder advances is especially important when a company has more than one shareholder or unsecured bank loans. Itâ€™s also relevant for tax purposes, because advances classified as debt typically require imputed interest charges. However, the tax rules may not always sync with GAAP.
To further complicate matters, shareholders sometimes forgive loans or convert them to equity. Reporting these types of transactions can become complex when the fair value of the equity differs from the carrying value of the debt.
When deciding how to classify shareholder advances, itâ€™s important to consider the economic substance of the transaction over its form. Some factors to consider when classifying these transactions include:
With shareholder advances, disclosures are key. Under GAAP, youâ€™re required to describe any related-party transactions, including the magnitude and specific line items in the financial statements that are affected. Numerous related-party transactions may necessitate the use of a tabular format to make the footnotes to the financial statements reader friendly.
Shareholder advances present financial reporting challenges that canâ€™t be fixed with a one-size-fits-all solution. We can help you address the challenges based on the nature of your transactions and adequately disclose these transactions in your financial statement footnotes. For assistance, contact our international tax advisors at Moore Stephens Doeren Mayhew today.
This article is a reprint from Moore Stephens Doeren Mayhewâ€™s GlobalVIEW.
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