Questions

I am closing the C-corp and want to be able to deduct the losses on my personal tax return. Can personal loan be deducted? Do I need to change the loan type to convertible debt and/or issue preferred shares.

You need to determine if your ownership qualifies under section 1244 - losses on small business stock.

These are some of the main qualifications
1. Stock must be in the hands of the originally issued. (You couldn't have bought it from someone)
2. Stock must have been issued for money or property.
3. Total capital contributions and paid-in surplus cannot exceed $1 Million.

Otherwise it will be classified as a capital loss and you will be limited to a $3000 deduction every year until exhausted.

Your question on the personal loan has a few undisclosed details that must be clarified for an accurate answer. Essentially you will have to qualify the "Loan" as a loan. Not only is a proper promissory note required, your corp will have had to make proper note payments with a market level interest rate. Otherwise, upon review of the IRS, they can classify the "Loan" as a capital contribution and disallow your deduction. This is a common mistake with individuals "Loaning" money to their businesses that deduct loan losses on their individual return only to have them disallowed due to lack of substantiation and proper procedure. If that is the case, it will end up as a capital loss and loss limited to the yearly $3000. That second "Contribution" that the IRS declares to be the case will not qualify under §1244.


Answered 6 years ago

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