S Corp Distributions A loan needs a note.

A loan is a third name.

After wages, and after cash that is not pay, a loan is the remaining honest name. Owners like it because a loan sounds reversible. Money left, and money is supposed to come back, so perhaps nothing was a distribution and nothing was pay. That hope is not a loan. A loan is paper.

The paper is a note. It names the company as the lender and the owner as the borrower, or the other way around if the owner put money in. It states interest. It states how and when the balance comes back. Payments that follow the note are the evidence that the paper was real. A balance that only grows is a warning that the paper was a costume.

We ask to see the note before we use the word. If the note is missing, we do not draft one on the spot to bless a transfer that already happened. A note written after the fact, to rename the past, is a different problem from a note that existed when the cash moved. The file shows which of those two papers is in front of us.

Interest and a real payback.

Interest is part of the definition we use. A loan without interest, sitting for years, looks like cash that left and was never meant to return. A payback plan that depends on a future good year is not yet a plan. We want dates, or at least a rhythm, and we want payments that have a chance of happening from money the owner actually has.

If the company is the borrower, the same questions run in reverse. Did the owner advance cash. Is there a note. Is the company paying it down, or is the balance a memory of old deposits that were really capital. Capital and a loan are both ways money arrives. They are not interchangeable labels.

Bookkeeping can show a liability account with the owner's name on it. That account is still a label until the paper and the payments agree with it. We will reclass the account when the facts disagree. We will not leave a flattering liability on the books because it lowers a distribution story.

What we will not call a loan.

We will not call it a loan because a distribution would exceed basis. The ceiling problem does not create a note. If basis is used up, the cash that is not wages has a different tax life, and renaming it a loan without paper does not change that life.

We will not call it a loan because wages feel expensive. Pay for work is still pay. A note does not convert wages into debt. If the owner did the work, payroll is the path, and a loan document beside payroll does not shrink the wage.

This page will not sketch a model note. The real note lives in your file or with your counsel. Once an engagement covers the reading, we can say whether that document is enough to support the name.

Related lines.

The label in the software is discussed on the draw page. The ceiling that makes people reach for the word loan is on the basis page. The wage that has to come first is on the wage page.