Expert: Arthur Naman - 8/12/2008

Question
An S corporation is paying back to the only shareholder what he loaned the corp.  How does the loan repayment affect taxes?  Interest paid is an expense and thus a corporate deduction, right?  Does the loan repayment affect earnings?  Is the principal paid affect earnings?Thanks.

Answer

How does the loan repayment affect taxes? -- There is no effect on income taxes. Its just like any other loan.

Interest paid is an expense and thus a corporate deduction, right? -- Yes, interest paid is a normal interest deduction.

Interest received by the shareholder is income on the individual's individual tax return.

Does the loan repayment affect earnings? -- No, not that I am aware of, except for interest paid of course.  

Is the principal paid affect earnings? -- No

There are exceptions to what I have said above if the loans were used to compute basis allowing the shareholder to take S corp losses on their individual return.