What are the factors considered in determining whether a loan to me by my corporation is a true loan, rather than a constructive dividend?

Your corporation can lend you money, but the transaction must look like a real loan or it will be treated as a constructive dividend (a dividend in disguise) by the Internal Revenue Service, with adverse tax consequences for you. The IRS looks at a number of factors in making this determination, including: (1) the extent to which you control the corporation (if you control a majority of the stock, that suggests a constructive dividend rather than a true loan; if you’re the sole shareholder, the IRS will examine the transaction with particular scrutiny); (2) the existence of earnings and profits, and whether your corporation has a history of paying dividends (adequate earnings and profits, coupled with no history of paying dividends, suggests a constructive dividend); (3) the size of the loans and your ability to repay them (large advances, with no reasonable prospect of repayment, suggest a dividend); (4) whether there is a ceiling on the amount that can be advanced (a limit tends to support a bona fide loan); (5) how you record the advances in the corporation’s books and records (carrying the disbursements as loans or accounts receivable tends to indicate a true loan); (6) whether you executed promissory notes (the absence of a note or other loan documentation is indicative of a constructive dividend); (7) whether you provided security for the advances (the lack of collateral pledged to secure repayment is indicative of a constructive dividend); (8) whether there is a fixed schedule of repayment (a regular repayment schedule tends to show a true loan); (9) whether interest was paid or accrued (the loan must bear interest at the applicable Federal rate to be considered a true loan); and (10) whether you actually made any repayments (making payments when due is strong evidence of a real loan). Check out our article on How the IRS Evaluates Shareholder Loans for additional information.