Document when borrowing from practice

Practice Pointers. By Cathy B. Goldsticker, AMNews contributor. June 18, 2001.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question In the past few years I have borrowed from my practice to make investments, pay personal expenses and invest in my vacation home. What should my practice be doing about this loan as far as interest payments and repayment are concerned? Is it acceptable to the IRS for my practice to extend this loan to me?

Answer Taking money out of your practice in a form other than compensation always requires extra caution and careful planning.

Making sure that the transaction is proper and in compliance with the tax laws is especially important since the parties involved are related and will attract the IRS' attention.

The type of entity your practice is -- S corporation or C corporation, for example -- will determine how serious and expensive the IRS' potential recasting of your loan transaction.

The predominant question the agency will research is whether there was intent to repay when the funds were transferred. It is not enough for the involved parties to testify that repayment is planned; they must also demonstrate it with certain actions.

The IRS recently issued a list of 12 factors it will consider when evaluating whether payments to practice owners will be regarded as loans as opposed to compensation or other types of payments. These IRS factors were designed and released for corporations but can apply to your practice if organized differently.

One factor the IRS will consider is to what extent you control your practice. The probability that the transaction will be viewed as arm's length is greater if you don't own a majority interest in your practice either directly or through related parties. [...]