Anna is the only shareholder of Corporation. Anna stock basis is $100,000. She m

Question

Anna is the only shareholder of Corporation. Anna stock basis is $100,000. She materially participates in the business and receives an annual salary of $50,000. Current economic conditions have caused cash flow issues for the corporation, so anna needs to transfer $60,000 to the business. Anna is trying to determine the best way to structure the cash transfer: a capital contribution, a loan to protect the stock investment, or a loan to protect her salary. From a tax perspective, how would you advise anna to structure the transaction in the event economic conditions continue to decline and the corporation may have to file for bankruptcy? Support your position with primary tax authority.

Explanation / Answer

In the event of bad economic conditions Anna should transfer as capital contribution to business. Because in bad economic conditions Corporation will to be able to pay fixed interest payment to Anna. But tax benefit will not be available to Anna in case of capital contribution and earning per share will also come down.

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