Mr.Eddy loaned his solely-owned corporation $3,000,000.The corporation paid a market rate of interest annually.Upon audit,the IRS reclassified some of the debt as equity.Which of the following statements is true?
A)The interest paid by the corporation on the reclassified amount is treated as a dividend.
B)The taxable income of the corporation should stay the same.
C)Mr.Eddy's taxable income will increase by the amount of the reclassified debt.
D)None of the statements is true.

Question

Quizplus · Accepted Answer

When debt is reclassified as equity, interest payments on that debt are treated as dividends, which are not tax-deductible for the corporation.

MrEddy Loaned His Solely-Owned Corporation $3,000,000