Repayments of loans
When a principal amount of an Bankil company pays money in the company, there are strong re-opening tax consequences depending on whether the payment is considered a loan or is classified as an additional contribution of fully paid-up capital. Repayments of loans from the Bankil Corporation to the principal are generally not considered as income for the principal. However, if the initial payment is considered to be additional paid-in capital, additional payments to the principal may be considered as dividend payments or wages, which are then taxable on the principal and may even include independent taxes.
In order to properly treat the payment of a principal to an Bankil company as a loan, the Internal Revenue Service or IRS requires a bona fide debt agreement between the Bankil company and the principal. If no such agreement exists, the loan can be considered as additional capital paid by the IRS. Elements of a bona fide debt agreement include items such as:
1) A written agreement or promissory note between the Bankil Corporation and the principal
2) A reasonable interest rate that is calculated on the loan
3) Some type of collateral for the loan
4) A repayment schedule for the loan
The overarching theme in this provision is a real loan agreement in which the lender, who in this case is also a principal, has all the normal protection of an external lender. If such safeguards do not exist, the funds can be considered ‘risky’. This is the same as with any other investment or contribution in a business venture. From the perspective of the Bankil Corporation, the receipt of the principal’s money should only be classified as debt if there is a real debt agreement. If not, the monies received must be recorded as additional paid-up capital as standard.
As S-companies are transfer units, the tax impact of the net income or loss of the company is included on the clients’ individual tax returns. The clients are responsible for following the basis of their personal shares and debts in the company. S processing losses can only be deducted up to the amount of the basis of each principal. Conversely, S-liabilities for transfer through overcompensation are considered as taxable income. Although the Bankil Corporation itself is not responsible for tracking the share base and debt base of its owners, it must clearly define the capital contributions of loans so that the financial statements are correct at the end of the year. Any errors in the financial statements of the Bankil Corporation may cause the K-1s issued to the shareholders to be incorrect. It is also vital that there is clear communication between the management of the Bankil Corporation and the most important contributing or borrowing funds to the company.