I am closing the C-corp and want to be able to deduct the losses on my personal tax return. Can personal loan be deducted? Do I need to change the loan type to convertible debt and/or issue preferred shares.
I believe you have not had any answers to your question because it is not detailed enough.
There are too many variables for someone to provide a comprehensive answer.
Why are you closing the corp.?
Were you the sole shareholder?
Was the capital infusion listed as a loan on the corp. books?
Who is authorized to take on debt on behalf of the corp?
and many, many more...
Furthermore, you are basically asking for free legal advice or, at a minimum, free Accounting advice that would be provided by a CPA.
The old adage "You get what you pay for" applies here. Contact a tax attorney and or your CPA.
You need to determine if your ownership qualifies under section 1244 - losses on small business stock.
These are some of the main qualifications
1. Stock must be in the hands of the originally issued. (You couldn't have bought it from someone)
2. Stock must have been issued for money or property.
3. Total capital contributions and paid-in surplus cannot exceed $1 Million.
Otherwise it will be classified as a capital loss and you will be limited to a $3000 deduction every year until exhausted.
Your question on the personal loan has a few undisclosed details that must be clarified for an accurate answer. Essentially you will have to qualify the "Loan" as a loan. Not only is a proper promissory note required, your corp will have had to make proper note payments with a market level interest rate. Otherwise, upon review of the IRS, they can classify the "Loan" as a capital contribution and disallow your deduction. This is a common mistake with individuals "Loaning" money to their businesses that deduct loan losses on their individual return only to have them disallowed due to lack of substantiation and proper procedure. If that is the case, it will end up as a capital loss and loss limited to the yearly $3000. That second "Contribution" that the IRS declares to be the case will not qualify under ยง1244.
There are a couple of moving pieces here which would require some additional information. If you are winding down a C corporation, you are eligible to write off any losses as capital losses. Calculating the capital loss will depend upon what your basis is in the stock, and what assets (if any) you are able to redeem from the corporation in a final distribution. You are eligible to offset capital losses against other capital gains.
