Yes, you can loan money to your business, and if your company is a corporation or LLC, the tax code treats that loan the same way it treats a loan from a bank: the business deducts the interest it pays you, and your principal comes back as a tax-free repayment rather than a taxable distribution. The catch is that the IRS looks hard at insider loans. A loan that lacks paperwork, charges no interest, or never gets repaid can be reclassified as a capital contribution, which strips out both tax benefits. Getting it right is a matter of documentation, a market-rate interest charge, and actually following the repayment schedule you set.
Why the Loan Is Legally Possible
A corporation or LLC is a separate legal person from its owners. That separation lets you and your business contract with each other the same way you would with a stranger. Your company can borrow, and you can lend and expect repayment with interest. The same legal fiction that shields you from personal liability for business debts is what makes an owner loan possible in the first place.
Before you move any money, read your corporate bylaws or LLC operating agreement. Some governing documents restrict insider lending or require board approval or a supermajority vote of the members before the company can take on debt from an owner. Skip that step and another shareholder or a creditor can later challenge the loan. For a single-owner entity this is mostly a formality, but documenting the authorization still matters for the reasons that follow.
The Interest Rate You Have to Charge
Federal tax law treats a below-market loan between a shareholder and a corporation as if the lender gave the borrower the forgone interest as a gift, which the borrower then paid back as interest. The result is imputed interest income to you whether your paperwork charges any or not. To avoid that fictional round-trip, charge at least the Applicable Federal Rate.
The IRS publishes the AFR monthly in three tiers based on the length of the loan:
- Short-term: three years or less
- Mid-term: over three years but not over nine years
- Long-term: over nine years
You lock in the rate that applies on the day the loan is made.1Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property For February 2026, the annual-compounding AFRs are 3.56% (short-term), 3.86% (mid-term), and 4.70% (long-term).2Internal Revenue Service. Rev. Rul. 2026-3, Applicable Federal Rates for February 2026 These rates change every month, so pull the current revenue ruling before finalizing terms. Charging more than the AFR is fine. Charging less triggers the imputed-interest rules.
The $10,000 Exception
If the total outstanding balance of all loans between you and your corporation stays at or below $10,000, the below-market interest rules don’t apply, and you could charge zero interest on a small bridge loan without the IRS imputing income. The exception disappears if one of the principal purposes of the interest arrangement is federal tax avoidance.3Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Most owner loans of meaningful size are above this threshold and need to carry the AFR.
What the Loan Agreement Needs
A handshake loan to your own company is practically an invitation to have it reclassified as equity. Before any money moves, draft a promissory note that reads like something a bank would produce. At a minimum it should state:
- The exact principal amount
- The interest rate, at or above the applicable AFR
- A maturity date
- A repayment schedule with specific principal and interest amounts, monthly or quarterly
- Default provisions, including any late fees
If the loan is secured, name the collateral: specific equipment, inventory, or real estate. To make the security interest enforceable against other creditors, you generally file a UCC-1 financing statement with your state’s secretary of state, listing the legal names of both the debtor (your business) and the secured party (you) along with a description of the collateral. Electronic filing fees typically run around $20 to $50, depending on the state. Perfecting the security interest matters most if the business has other creditors or if bankruptcy is a realistic possibility, because an unperfected interest can be wiped out by a trustee.
How the IRS Decides It’s a Loan and Not an Investment
Congress gave Treasury authority to write regulations identifying the factors that separate debt from equity, and the statute lists several of them:
- A written, unconditional promise to pay a fixed sum on a set date at a fixed rate
- Whether the loan is subordinated to other creditors
- The company’s debt-to-equity ratio
- Whether the debt is convertible into stock
- Whether the loans are proportional to ownership percentages, which suggests capital contributions in disguise
No single factor decides the question.4Office of the Law Revision Counsel. 26 USC 385 – Treatment of Certain Interests in Corporations The more your arrangement looks like an arm’s-length bank transaction, the safer you are. A company funded 95% by owner loans and 5% by equity draws attention. Courts call that “thin capitalization,” and it gives the IRS a strong argument to recharacterize the debt as a capital contribution. When that happens the business loses its interest deduction and your repayments become taxable dividends instead of tax-free return of principal.
Beyond the formal factors, courts apply a substance-over-form test. If the business never makes a payment, you never demand one, there is no real maturity date, and repayment depends entirely on future profits, the loan is one in name only. The best evidence that a loan is genuine is a record of regular, on-time payments that track the promissory note.
Moving the Money and Booking It
Transfer the funds by wire or check directly from your personal account to the business account. Never fund the loan in cash or through a series of vague transfers that muddy the trail. On the company’s books, the incoming funds are a liability under “notes payable” or “shareholder loan payable,” not revenue and not equity. Your personal records show a corresponding receivable.
The company should produce a board resolution (for a corporation) or a written member consent (for an LLC) authorizing the loan and acknowledging the note’s terms. Keep that document in the corporate minute book with the signed note. These are the first things an auditor or bankruptcy trustee will ask to see.
Interest Reporting and the Matching Trap
If the business pays you $10 or more in interest during the year, it issues you a Form 1099-INT.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID You report the interest as personal income; the business deducts it as an expense. That symmetry is part of what makes the structure attractive.
One trap catches many owners. If you personally use the cash method (as most individuals do) and your business uses the accrual method, the related-party matching rule prevents the business from deducting accrued interest until you actually receive the payment and include it in income.6Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers The practical rule: don’t let interest sit on the books for years without being paid. Make the payments, deposit them, and report the income. Accruing without paying costs the business the deduction.
The S-Corporation Bonus: Debt Basis
If your business is an S corporation, lending it money has a benefit beyond the interest deduction. The loan increases your “debt basis,” which controls how many pass-through losses you can deduct. When the S corp’s losses exceed your stock basis, you can keep deducting losses up to the amount of your debt basis from personal loans to the company.7Office of the Law Revision Counsel. 26 USC 1367 – Adjustments to Basis of Stock of Shareholders, Etc.
The IRS is strict about what qualifies. You must have personally lent the money to the S corporation. Guaranteeing a bank loan does not create debt basis, even if the bank would never have lent without your guarantee. The exception is that if you actually make payments under the guarantee, the amount you paid then creates basis.8Internal Revenue Service. S Corporation Stock and Debt Basis When you claim losses against debt basis, that basis is reduced. If the company later becomes profitable, net income restores debt basis before it increases stock basis, and that ordering matters because distributions come out of stock basis first.
If the Business Can’t Repay
Sometimes the company can’t repay and the owner considers just forgiving the debt. It feels painless, but the tax result can be harsh. When a creditor cancels a debt, the borrower generally recognizes cancellation-of-debt income equal to the forgiven amount, and the business would owe tax on the full principal you wrote off as if it had earned that money.9Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Insolvency and Title 11 bankruptcy exclusions exist, but they require reducing tax attributes like net operating losses and credit carryforwards, so the benefit is deferred rather than free.
In most situations, the better move is converting the loan to equity through a formal contribution to capital. Conversion doesn’t trigger cancellation-of-debt income for the business. You give up the right to repayment, but you increase your basis in the company, which can reduce your taxable gain when you eventually sell.
Writing Off a Loan That Goes Bad
If the business fails and can’t repay you, the tax treatment of your loss depends on whether the IRS considers the bad debt “business” or “nonbusiness.” A debt is a business bad debt only if your primary motive for making the loan was tied to a trade or business you personally conduct. For most owner-to-company loans, the IRS treats the debt as nonbusiness unless you can show a trade-or-business relationship beyond being an investor.
The distinction matters. A business bad debt is deductible against ordinary income, in full or in part. A nonbusiness bad debt must be totally worthless before you can deduct anything, and when you can, it is a short-term capital loss on Form 8949.10Internal Revenue Service. Topic No. 453, Bad Debt Deduction Short-term capital losses run into the annual $3,000 net capital loss cap, so a large worthless loan can take many years to deduct. Keep demand letters, collection attempts, and evidence of the company’s insolvency to support the write-off if the IRS pushes back.
Where You Stand in Bankruptcy
If the business files for bankruptcy, your shareholder loan is a general unsecured claim. On paper you stand alongside trade creditors and other unsecured lenders, waiting for whatever remains after secured creditors and priority claims like wages and certain taxes are paid. In practice, insider loans face extra skepticism.
Under the equitable subordination doctrine, a bankruptcy court can push your claim below other creditors if you engaged in unfair conduct, such as lending on favorable terms and then trying to collect ahead of outside creditors who dealt with the business at arm’s length.11Office of the Law Revision Counsel. 11 USC 510 – Subordination A secured claim can be demoted to unsecured, and an unsecured claim can be pushed behind everyone else’s.
The theme runs through every part of the transaction. Treat the loan like a real one with a real lender: documented terms, market-rate interest, a genuine payment history, and proper authorization. An owner who cuts corners on the paperwork and then tries to jump the line in bankruptcy is exactly the situation equitable subordination was built to address.