Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.
A)Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
B)Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
C)Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
D)Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
E)None of the above.

Question

Quizplus · Accepted Answer

When a shareholder makes an interest-free loan to a corporation, the transaction is seen as a form of disguised dividend distribution. Therefore, the IRS requires imputed interest to be calculated and recognized as income by the shareholder and expense by the corporation. In this case, Sarah must recognize interest income on the $200,000 loan, which is the amount of interest that would have been charged if a third-party lender provided the funds. Teal, Inc. must recognize a matching interest expense, reducing its taxable income.

Sarah, a Majority Shareholder in Teal, Inc