ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Shared Pockets Entail shared Tax Trouble

Updated on January 16, 2013

Related Party Loans

Related party loans must carry interest in one form or the other which should be visibly fair otherwise the IRS officials may reopen the case and recalculate the interest to be paid on the principal amount.

Usually there are in business related party transfers or the veterinary practices of transferring money or advancing money and this could be in the form of paying for the other party's debt obligations.

Often, the payments within the fold of incorporated practice are tax-free but there may be certain other types of tax liabilities. Usually, it happens that the tax advisers of the company concerned ignore the routine transfer of money between the shareholders and the company under the veterinary practice and it is so because the ever-vigilant officials of the IRS (Internal Revenue Service) hardly go after this loophole.

IRS Tax Trouble

IRS Pursues Cross Loans

Usually, the officials of the IRS ask the incorporated companies to distribute the operative profits of the company concerned as dividends rather than to pay for the compensations and this was prior to the enactment of the laws pertaining to the lower and temporary rates applicable on the dividend payouts.

Any extra type of compensation which is paid and comes under the vigilant eyes of the IRS officials would mean that the principal party/shareholder was trying to avoid the double taxation on the dividend income - for the first time when the payment is made by the company and for the second time when the receipt of the dividend is there at the end of the shareholder. But now the times have taken a change.

Now the officials of the IRS go in for the finding out of related party transactions, particularly the so called "cross loans" and others "below-market" loans that constitute a transaction between a company incorporated and any of its many shareholders. And it is as my own personal pocket and my business books are two different identities.

Often when a big shareholder having controlling rights in the company opts for advancing money to the company concerned, then it is assumed to be the contribution to the capital on the part of the shareholder concerned and as such there is no question of any tax liabilities. On the other hand, many other transfers between a shareholder and a company should involve the payment of due interest on the transferred amount.

The interest payments made by the borrower company and deducted from the Profit & Loss A/c would constitute as an income of the lender shareholder. A lower rates of interest or the negligible rates of interest on the amount would involve naturally a lower tax liability for one party i.e. the party in receipt of the interest payments.

Such a transfer of money from the shareholders to their company, usually called a veterinary practice in business terms, does not require any other tax deduction as the interest payments are ignored or are reported at a very lower rates of interest. If there is any transaction of money involved within the concerned parties, i.e. the family members, between a partner and his/her partnership firm, a veterinarian and his/her incorporated company is classified as a related-party transaction unless and until qualified otherwise in some other category.

The tax officials concerned with the IRS have the powers to reopen the related transaction and go through the same thoroughly. This would result in the payment of interest from the lender to the borrower at a rate of interest deemed to be fair and fit for the transaction by the IRS officials. These types of hits of retroactive nature could become a cause for the substantial tax bill on the part of the lender party.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://corp.maven.io/privacy-policy

Show Details
Necessary
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Marketing
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Statistics
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)