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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 seek ways to extract profits without facing taxes on distributions, as such distributions are typically treated as taxable dividends. Some shareholders prefer to classify these distributions as loan repayments to sidestep double taxation. However, the IRS has established criteria for what constitutes a bona fide shareholder loan. If a distribution is deemed not to be an authentic loan repayment during an audit, the IRS may label it as a constructive dividend, leading to taxation. To prevent this, shareholders should draft and sign a valid loan agreement.
