Making loans to your corporation became more hazardous 33 years ago with the Tax Reform Act of 1986. That was pretty awful.
But the new Tax Cuts and Jobs Act tax reform made things worse for tax years 2018 through 2025. If you operate your business as a corporation, you need to know how the rules apply when you loan money to your corporation.
Imagine this: you loan $100,000 to your corporation.
The corporation goes bankrupt and has no money to pay you anything on your loan.
And now, the new tax law gives you a zero tax deduction for your $100,000 loan.
Yep! That’s the way it is.
If you think the corporation is going to fail, but, against your better judgment, you still want to make the loan, consider an additional investment in the corporation, called an “additional contribution to capital.”
If you do this and the business fails, you generate a capital loss. Although the limit on net capital losses (after offsets with gains) is $3,000 a year, that’s certainly preferable to no deduction at all.