The tax traps of personally guaranteeing a loan to your corporation
The tax traps of personally guaranteeing a loan to your corporation
If you’re considering guaranteeing, or are asked to guarantee, a loan to your closely held corporation, it’s important to understand the potential tax consequences. Acting as a guarantor, endorser or indemnitor means that if the corporation defaults, you could be responsible for repaying the loan. Without planning ahead, you may face unexpected tax implications.
A business bad debt
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations. A nonbusiness bad debt is deductible only if it’s totally worthless.
To be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee is to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee is primarily to protect your investment rather than your job.
Proving the relationship
Except in the case of job guarantees, it may be difficult to show the guarantee is closely related to your trade or business. You have to show that the guarantee is related to your business as a promoter, or that the guarantee is related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
Note: The IRS and courts will scrutinize the dominant motive carefully. Reasonable compensation doesn’t always mean money. It can include protecting employment or business interests.
Additional requirements
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three conditions:
- You have a legal duty to make the guaranty payment (although there’s no requirement that a legal action be brought against you).
- The guaranty agreement is entered into before the debt becomes worthless.
- You receive reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. Consult with us to learn all the implications and to help ensure the best tax results.
Developing a comprehensive AI strategy for your business
Developing a comprehensive AI strategy for your business
We’ve reached a point where artificial intelligence (AI) offers functionality and enhancements to most businesses. Yours may be able to use it to streamline operations, improve customer interactions or uncover growth opportunities.
However, getting the max benefit calls for doing much more than jumping on the bandwagon. To make this technology truly work for your company, you’ve got to develop a comprehensive AI strategy that aligns with your overall strategic plan.
Identify your needs
Many businesses waste resources, both financial and otherwise, by hastily investing in AI without thoroughly considering whether and how the tools they purchase effectively address specific needs. Before spending anything — or any more — sit down with your leadership team and ask key questions such as:
- What strategic problems are we trying to solve?
- Are there repetitive tasks draining employees’ time and energy?
- Could we use data more effectively to guide business decisions?
The key is to narrow down specific challenges or goals to actionable ways that AI can help. For example, if your staff spends too much time manually sorting and answering relatively straightforward customer inquiries, a simple AI chatbot might ease their workload and free them up for more productive activities. Or if forecasting demand is a struggle, AI-driven analytics may help you develop a clearer picture of future sales opportunities.
Be strategic
As you develop an AI strategy, insist on targeted and scalable investments. In other words, as mentioned, prospective solutions must fulfill specified needs. However, they also need to be able to grow with your business.
In addition, consider whether the AI tools you’re evaluating suit your budget, have reliable support and will integrate well with your current systems. Don’t ignore the tax implications either. The recently passed One, Big, Beautiful Bill Act has enhanced depreciation-related tax breaks that AI software may qualify for if you buy it outright.
Provide proper training
Training is another piece of the puzzle that often goes missing when businesses try to implement AI. Earlier this year, the Pew Research Center published the results of an October 2024 survey of more than 5,200 employed U.S. adults. Although 51% of respondents reported they’d received extra training at work, only 24% of that group said the training was related to AI.
This would seem to indicate that AI-specific training isn’t exactly commonplace. Make sure to build this component into your strategy. Proper training will help ensure a smoother adoption of each tool and increase your odds of a solid return on investment.
As you provide it, also ease employee concerns about job loss or disruption. That same Pew Research Center survey found that 52% of workers who responded are worried about the future impact of AI in the workplace. You may want to help your staff understand how the technology will support their work, not replace it.
Measure and adjust
As is the case with any investment, every AI tool you procure — whether buying it or signing up for a subscription — should deliver results that justify its expense. While shopping for and rolling out a new solution, clearly establish how you’ll measure success. Major factors may include time saved, customer satisfaction and revenue growth.
Once a solution is in place, don’t hesitate to make adjustments if something isn’t working. This may involve providing further training to users or limiting the use of an AI tool until you gain a better understanding of it.
If you’re using a subscription-based solution, you may be able to cancel it early. However, first check the contract terms to determine whether you’d suffer negative consequences such as a substantial termination fee or immediate loss of data.
Account for everything
There’s no doubt that AI has a lot to offer today’s small to midsize businesses. Unfortunately, it can also be overwhelming and financially costly if you’re not careful about choosing and implementing solutions. We can help you develop an AI strategy that accounts for costs, tax impact and return on investment.
Is your business ready for digital documents and e-signatures?
Is your business ready for digital documents and e-signatures?
Whether signing a vendor agreement, approving a repair estimate or applying for a loan, chances are you’ve signed something digitally in recent months. In 2026, digital documents and e-signatures are no longer just a convenience — they’re fast becoming the standard.
Businesses of all types and sizes are embracing digital workflows to improve efficiency, reduce turnaround times and meet customer expectations. If your company is still relying on paper documents and manual signatures, now may be the time to take a fresh look at what you might be missing.
Potential advantages
For small to midsize businesses, there are generally three reasons to use digital documents with e-signatures. First, of course, it’s faster. When you can review and sign a business document electronically, it can be transmitted instantly and approved much more quickly.
And this works both ways: your customers can sign contracts or submit orders for your products or services, and you can sign similar documents with vendors, partners or consultants. What used to take days or even weeks, as delivery services carried out their duties or paper envelopes crisscrossed in the mail, can now occur in a matter of hours.
Second, it’s a strong safeguard against disaster, theft and mishandling. Paper is all too easily destroyed, damaged, lost or stolen. That’s not to say digital documents are impervious to thievery, corruption and deletion. However, a trusted provider should be able to outfit you with software that not only allows you to use digital documents with e-signatures, but also keeps those files encrypted and safe.
Third, as mentioned, more and more customers want it. In fact, this may be the most important reason to incorporate digital documents and e-signatures into your business. Younger generations have come of age using digitized business services. They expect this functionality and may prefer a company that offers it to one that still requires them to put pen to paper.
Valid concerns
Many business owners continue to have valid concerns about digital documents and e-signatures. For example, you may worry about how legally binding a digitized contract or other important document may be. However, e-signatures are now widely used and generally considered lawful under two statutes: 1) the Electronic Signatures in Global and National Commerce Act of 2000, a federal law, and 2) the Uniform Electronic Transactions Act, which governs each state unless a comparable law is in place.
Indeed, every state has legislation in place legalizing e-signatures. There may be some limited exceptions in certain cases, so check with your attorney for specifics if you decide to transition to using the technology.
Another concern you might have is cybersecurity. And there’s no doubt that data breaches are now so common that business owners must expect hacking attempts rather than hope they never happen.
As mentioned, a reputable provider of digital document technology should be able to equip your company with the necessary tools to defend itself. But don’t stop there. If you haven’t already, establish a sound, regularly updated cybersecurity strategy that encompasses every aspect of your business — including when and how digital documents and e-signatures are used.
Strategic move
Implementing this increasingly used technology is a strategic move. As such, it will likely involve costs related to vetting software providers, training your team, and updating internal assets and processes. But it also may be a wise investment in faster transactions, improved security and a better customer experience. Plus, you’ll pay less in express delivery fees. We can help you evaluate the idea, forecast your return on investment, and, if appropriate, build a smooth transition plan that fits your budget and goals.
Why start-ups should consider launching as S corporations
Why start-ups should consider launching as S corporations
Launching a new business brings tough decisions. And that holds true whether you’re a fledgling entrepreneur starting your first company or an experienced businessperson expanding into a second or third enterprise.
Among the most important calls you’ll need to make is how to structure the start-up for tax purposes. For many business owners, electing S corporation status is a savvy move. But it’s not right for everyone. Here are some important points to consider before you decide.
What’s it all about?
An S corporation is a tax election available only to certain U.S. companies. To make the election, you’ll need to file IRS Form 2553, “Election by a Small Business Corporation,” typically within 75 days of forming the business or the start of the tax year to which you want the election to apply.
If you elect S corporation status, the IRS will treat your start-up as a “pass-through” entity. This means the business generally won’t pay federal income taxes. Instead, profits and losses will pass through to your individual tax return and those of other shareholders.
As a result, you’ll avoid the “double taxation” faced by shareholders of C corporations — whereby the company pays taxes on the business’s income and then shareholders pay tax on any dividends received. In addition, S corporation shareholders may be eligible for the Section 199A qualified business income deduction for pass-through entity owners. It was recently made permanent under the One Big Beautiful Bill Act.
Which businesses qualify?
IRS rules limit which companies can elect S corporation status. To qualify, your start-up must:
- Be an eligible domestic corporation or limited liability company (LLC),
- Have no more than 100 shareholders who must be U.S. citizens or residents (certain trusts and estates may also be eligible), and
- Offer only one class of stock.
Insurance companies, financial institutions using the reserve method of accounting and domestic international sales corporations are generally ineligible.
Why do it?
As mentioned above, the main advantage of electing S corporation vs. C corporation status is avoiding double taxation. But there are other reasons to do it.
For example, many start-ups incur losses in their first few years. S corporation status allows owners to offset other income with those losses, a tax benefit that’s unavailable to C corporation shareholders.
S corporations also have advantages over other types of pass-through entities. Generally, all trade or business income that flows through to sole proprietors and partners in partnerships is subject to self-employment taxes — even if the income isn’t actually distributed to the owners. S corporations can divide their income into shareholder-employee salaries and distributions. The salary portion is subject to payroll taxes, but distributions aren’t. So, by drawing a smaller salary (but one that’s reasonable in the eyes of the IRS) and taking the remainder as distributions, S corporation shareholder-employees can reduce their overall tax burden.
Liability protection is another advantage S corporations have over sole proprietorships and partnerships. S corporation status shields shareholders’ personal assets from business debts and legal claims, provided applicable rules are followed. Operating as an S corporation can also make your new business appear more credible to lenders, investors and customers because of its formalized, protective framework.
What are the drawbacks?
Electing to be treated as an S corporation has its drawbacks. Your start-up will have to follow strict IRS rules, which include keeping up with filing requirements and maintaining accurate financial records. Failure to comply could lead to back taxes, interest and penalties. It could even mean losing your S corporation status in a worst-case scenario.
Indeed, S corporations tend to incur higher administrative expenses than other pass-through entities. You’ll need to file corporate tax returns and meet state-level requirements. The extra complexity may outweigh the tax advantages — especially for newly launched companies with little to no profits.
Finally, it bears repeating: Although the salary/distributions income-splitting strategy mentioned above is advantageous, it can draw IRS scrutiny. Paying shareholder-employees an unreasonably low salary to avoid payroll taxes could trigger an audit with negative consequences.
Who can help?
Congratulations and best wishes on your forthcoming start-up! Electing S corporation status may be the right way to go. However, you’ll need to assess a wide variety of factors, including projected profits, the number of shareholders and your comfort level with the administrative requirements.
Before you do anything, contact us. We can help you evaluate whether operating as an S corporation aligns with your strategic and financial goals. If it does, we’d be happy to assist you with the filing process and compliance going forward.
Milestone moments: How age affects certain tax provisions
Milestone moments: How age affects certain tax provisions
They say age is just a number — but in the world of tax law, it’s much more than that. As you move through your life, the IRS treats you differently because key tax rules kick in at specific ages. Here are some important age-related tax milestones for you and loved ones to keep in mind as the years fly by.
Ages 0–23: The kiddie tax
The kiddie tax can potentially apply to your child, grandchild or other loved one until age 24. Specifically, a child or young adult’s unearned income (typically from investments) in excess of the annual threshold is taxed at the parent’s higher marginal federal income tax rates instead of the more favorable rates that would otherwise apply to the young person in question. For 2025, the unearned income threshold is $2,700.
Age 30: Coverdell accounts
If you set up a tax-favored Coverdell Education Savings Account (CESA) for a child or grandchild, the account must be liquidated within 30 days after the individual turns 30 years old. To the extent earnings included in a distribution aren’t used for qualified education expenses, the earnings are subject to tax plus a 10% penalty tax. To avoid that, you can roll over the CESA balance into another CESA set up for a younger loved one.
Age 50: Catch-up contributions
If you’re age 50 or older at end of 2025, you can make an additional catch-up contribution of up to $7,500 to your 401(k) plan, 403(b) plan or 457 plan for a total contribution of up to $31,000 ($23,500 regular contribution plus $7,500 catch-up contribution). This assumes that your plan allows catch-up contributions.
If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $3,500 to your SIMPLE IRA for a total contribution of up to $20,000 ($16,500 regular contribution plus $3,500 catch-up contribution). If your company has 25 or fewer employees, the 2025 maximum catch-up contribution is $3,850.
If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $1,000 to your traditional IRA or Roth IRA, for a total contribution of up to $8,000 ($7,000 regular contribution plus $1,000 catch-up contribution).
Age 55: Early withdrawal penalty from employer plan
If you permanently leave your job for any reason after reaching age 55, you may be able to receive distributions from your former employer’s tax-favored 401(k) plan or 403(b) plan without being socked with the 10% early distribution penalty tax that generally applies to the taxable portion of distributions received before age 59½. This rule doesn’t apply to IRAs.
Age 59½: Early withdrawal penalty from retirement plans
After age 59½, you can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k) accounts and pensions) without being hit with the 10% early distribution penalty tax. The penalty generally applies to the taxable portion of distributions received before age 59½.
Ages 60–63: Larger catch-up contributions to some employer plans
If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $11,250 to your 401(k) plan, 403(b) plan, or 457 plan. This assumes your plan allows catch-up contributions.
If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $5,250 to your SIMPLE IRA.
Age 73: Required minimum withdrawals
After reaching age 73, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts and 401(k)s) and pay the resulting extra income tax. If you fail to withdraw at least the RMD amount for the year, you can be assessed a penalty tax of up to 25% of the shortfall. However, if you’re still working after reaching age 73 and you don’t own over 5% of your employer’s business, you can postpone taking RMDs from the employer’s plan(s) until after you retire.
Watch the calendar
Keep these important tax milestones in mind for yourself and your loved ones. Knowing these rules can mean the difference between a smart tax strategy and a costly oversight. If you have questions or want more detailed information, contact us.