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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, as cash or property transfers to them are typically taxed as dividends. To avoid this, some shareholders attempt to classify these distributions as loan repayments, thus sidestepping double taxation. The IRS has established criteria for distinguishing bona fide shareholder loans. If the IRS audits and finds a distribution lacking genuine loan characteristics, it may be reclassified as a taxable constructive dividend. To prevent this, shareholders should establish a valid loan agreement, which must be written and signed by both parties.
