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Loans To Employees - Officer Accounts Receivable

loans to employeesMy company has "loaned" an officer funds under a promissory note.  This has accumulated and the company is now doing well enough to pay him a salary.  Is there any way to reduce the promissory note without having to have him pay it with after tax dollars?  thanks.


Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

You could forgive the loan over time; the officer would pay the tax on the forgiven part, but would not be out of pocket.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

Your quotes around "loan" are obviously deliberate, and I can assure you that you want to get ahead of this before the IRS does. They do not take kindly to schemes designed to defer income taxes, FICA, etc. to later periods, on constructive receipts of cash through salaries disguised as loans, whether through forgiveness or otherwise.

I know of a company where the CEO did exactly the same thing. He now owes the IRS a large six-figure sum on such "loans", a lot of which is penalties and interest. Oh yes, he is also now serving 13 years for other fun and games within the company.

If there was a way to answer your question, I would not go on the record with it. And I would likely not stay around as the CFO.

steven gagnon
Title: principal
Company: blumshapiro
(principal, blumshapiro) |

I agree with Lee. Dangerous game... What you could do is tack on another $x in salary and then take that amount and reduce the loan each year. He would be responsible for the income taxes though. I assume he is well past the FICA levels, so basically he will be out of pocket for the income taxes. You can do the same thing with a cashless bonus. Both are "nothing out of pocket", but has the same impact as if he got the cash and paid it off at arms length.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

For all the reasons cited above, we suspended and then barred any officer loans. There is no way to avoid the tax consequences and get a clean audit.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

No. Debt forgiveness saves the company cash, but creates taxable income for the owner, who may need cash to pay taxes. You missed a chance to to use deferred compensation originally, although there are distribution restrictions to liability distributions.

Robert Sheidler
Title: Consultant
Company: Self
LinkedIn Profile
(Consultant, Self) |

It has been a long time since I worked as a tax accountant, but I have to agree with what the others have said. Almost certainly, there is no legal way to avoid having the officer subject to tax on this -- regardless of what legal jurisdiction you are in.

I guess I am a bit offended by the idea that anyone should think that he/she SHOULD be able do so: the idea that highly compensated executives should be entitled to tax-free compensation when ordinary workers are not.

Off my soapbox now -- I suggest that quite possibly, this "loan" should have been treated as compensation in the year received, and that potentially, the company could be at risk for fines and penalties for not having withheld and remitted income and possibly payroll taxes in the earlier period. Of course, without knowing the original intent or other facts of the case, that is a bit speculative.

If I were CFO, I think I would insist that it be repaid now, even if that means declaring a bonus, and then applying the bonus toward the repayment of that loan. I also might want to consult with an attorney for advice concerning the company's, and my own, legal exposure in the matter.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

I used to work in the tech sector and it used to be common to provide payments with a promissory note that was eventually forgiven. We used to put the "forgiven" amount in the person's W-2 and be done with it. As the others mentioned, it is a good idea to stop this as the IRS frowns on this type of deferred compensation. I would put the entire amount in his W-2 or have him pay it off.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Don't forget to make sure that the Promissory Note has an interest rate that could be defended, i.e. tied to some measure to show that it's not an interest free loan, even if its tied to a passbook savings interest rate.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Wayne's point is very important here (so backing it up). If the note is long lived at all, the lack of a market interest rate could trigger problems. I can't predict what those will be, but as Robert, Patrick et al point out, the Deferred Comp hole is not one you want to discover the depths of.


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