Corporation-Shareholder Loans
Response to the following problem:
On January 1, a corporation loans its shareholder, Lynda Matsen, $120,000. The terms of the loan require that Lynda pay interest annually based on a 2.5% annual rate of interest. In addition, Lynda is to repay the $120,000 at the end of six years. At the time the loan was made, the current annual AFR short-term, mid-term and long-term rates were 4.5%, 5.5% and 6.5%, respectively. Determine the tax consequences of this loan to both the corporation and to Lynda in the first year.