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In this tutorial, Jeff Louisville, a staff accountant, discusses how to avoid constructive dividends on shareholder loans in closely held corporations. Shareholders often face the challenge of extracting profits without incurring taxes on distributions, as cash or property transfers are typically considered taxable dividends. To circumvent double taxation, some shareholders prefer to categorize these distributions as loan repayments. However, the IRS has established criteria for bona fide shareholder loans. If the IRS finds a distribution isn't a legitimate loan repayment during an audit, it may reclassify it as a taxable constructive dividend. To prevent this, shareholders should ensure that a valid loan agreement is created, which must be written and signed by both parties.
