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In this tutorial, Jeff, a staff accountant, explains how shareholders of closely held corporations can avoid constructive dividends on shareholder loans. Distributions of cash or property to shareholders are typically taxed as dividends. To prevent double taxation, some shareholders may label these distributions as loan repayments. However, the IRS requires that a distribution qualifies as a bona fide loan; otherwise, it may be reclassified as a taxable distribution, known as a constructive dividend. To mitigate this risk, shareholders should establish a valid loan agreement that is written and signed by both parties.
