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Tax Law (Questions About Taxes)/Loans to related companies

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Question
Hello Abraham and Happy New Year.

You recently helped me out and hopefully you can again.

Client with 2 C-Corps. Auto Body Shop and Rental Property. Auto Body rents from R/E both owned by the same shareholder. The auto body is paying just enough rent to cover the mortgage but then there's not enough to cover the R/E taxes, therefore making loans. I'm sure this is so R/E company doesn't show a high profit, another story.

Therefore, Auto body is making loans to R/E to cover the taxes and the loans keep growing. At this rate the R/E company will not generate enough cash flow to cover all it's expenses unless addl rent is paid. I know he can't keep making loans as it will keep growing. I don't think there is a chance of liquidating the companies at this point.

There is no formal agreement with these loans and no interest expense or income is being recorded or paid. My thought is at some point these loans have to be repaid or there will be income.

How is this best handled from both companies?  

Thank you ver much in advance.

Answer
Dear Jeff,

first and foremost, there need to be written instruments and agreements between both C-corp especially they are owned by the same shareholder. The Service, in situations like these would fold both entities in, and will claim substance over form.

Rent charged should by R/E be charged at market rate, and the R/E need to act like it is in business, and the contracts that it engage in need to be sound contracts.

Before claiming any losses on these loans, they need to be true losses and not related parties forced losses.

I hope this helped.

Regards,
Abraham Itani, CPA


P.S. please, rate my answer

Tax Law (Questions About Taxes)

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ABRAHAM ITANI, CPA

Expertise

TAX QUESTIONS DOMESTIC AND INTERNATIONAL OUTBOUND AND INBOUND. FBAR COMPLIANCE. CORPORATE, PERSONAL, PARTNERSHIP, PASS TROUGH ENTITIES, S-CORPORATION, LLC, TRUST, GIFT TAX, 1120, 1040, LATE FILING, NON FILING, AMT, FTC.

Experience

MORE THAN 10 YEARS OF STATE AUDIT TAXATION, MORE THAN 10 YEARS OF PRIVATE AND PUBLIC TAX EXPERIENCE WITH ITANI ACCOUNTING AND TAX, KPMG AND MNP. DEALING WITH HIGH NET WEALTH INDIVIDUALS, LARGE PARTNERSHIPS, EXPAT., CFC AND PFIC. DEALING WITH TAXING AUTHORITY ON ISSUES OF NON FILINGS AND LATE FILINGS.

Organizations
MEMBER OF AICPA, AND NJSCPA.

Education/Credentials
CERTIFIED PUBLIC ACCOUNTANT IN NEW JERSEY AND COLORADO.

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