Recent Posts:5 Ways to take money out of your C corporation besides a dividendIf you own a closely held C corporation, you may be looking for ways to take money out of the business for personal use. A dividend is one option, but it can come with a tax cost because your corporation generally can’t deduct dividends it pays to shareholders. Depending on your situation, there may be other ways to receive cash or benefits from your corporation. Here are five options to consider. If you need clarity on where your business stand, you can reach out to your local Padgett office. 1. Repay money you previously loaned to the corporationIf you’ve personally loaned money to your corporation, the business can generally repay the principal without treating the payment as a dividend. The principal repayment generally isn’t taxable to you unless the amount you receive is more than your adjusted tax basis in the debt. Any interest the corporation pays you is taxable income to you, while the corporation may be able to deduct the interest, subject to applicable interest-deduction limitations and related-party timing rules. The key is making sure the money you originally put into the business was actually a loan, rather than a capital contribution. Simply calling an advance a “loan” doesn’t make it one for tax purposes. The IRS looks at the facts and circumstances, including whether:
Good documentation is important. If the arrangement doesn’t qualify as bona fide debt, payments to you could instead be treated as corporate distributions and taxed as dividends to the extent of the corporation’s earnings and profits. 2. Borrow money from the corporationAnother option is to borrow money from your corporation rather than taking it as a dividend. A properly structured shareholder loan generally allows you to receive the cash without creating immediate taxable income. However, this needs to be a real loan. The arrangement should be documented with a loan agreement or promissory note, and the terms should be similar to what an unrelated lender would require. This generally includes:
You should also have the ability and intent to repay the loan and actually make payments according to the agreed-upon terms. There is a limited exception for certain shareholder loans of $10,000 or less. A corporation can generally make a de minimis loan of $10,000 or less without charging interest, unless tax avoidance is one of the principal purposes of the arrangement. If the total outstanding balance is more than $10,000, complicated “imputed interest” rules can apply if the corporation doesn’t charge an adequate interest rate. The IRS publishes applicable federal rates, or AFRs, each month based on the length of the loan. If a loan is made at below-market interest, the IRS may treat the unpaid interest as additional income to you. Depending on the circumstances, that amount could be treated as a constructive dividend or additional compensation. Additional compensation may be deductible by the corporation if it is reasonable, but it’s subject to payroll taxes. There’s another important consideration: If the corporation later cancels the loan, the canceled amount may be treated as a constructive dividend. The corporation must also report interest it receives from shareholder loans as interest income. 3. Increase your compensation or provide certain benefitsIf you work for your corporation, you may be able to take additional cash through a salary increase or bonus. The corporation can generally deduct reasonable compensation paid for services you provide. The tradeoff is that compensation is taxable to you as wages and is subject to payroll taxes. Another possibility is receiving certain tax-free or tax-advantaged fringe benefits instead of additional taxable wages. Depending on the benefit, your corporation may generally be able to deduct the cost while the benefit is excluded from your taxable income. Examples can include:
Each benefit has its own eligibility requirements, dollar limits and reporting rules. Some tax exclusions can also be limited for highly compensated employees if a benefit plan favors them over other employees. You can also establish a written Section 125 cafeteria plan, sometimes called a salary reduction plan. This allows employees to use part of their compensation for certain qualifying benefits on a tax-free basis rather than receiving that amount as taxable wages. Cafeteria plans have specific eligibility, documentation and nondiscrimination requirements, so they need to be set up and administered correctly. 4. Rent property or equipment to your corporationIf you personally own real estate or equipment that your corporation uses, you may be able to lease that property to the business. The corporation can generally deduct reasonable rent as a business expense, while you report the payments as rental income. There are some additional tax rules to consider, including the passive activity and self-rental rules, which can affect how the rental income and expenses are treated. The rent should also be consistent with what you would charge an unrelated party for the same property. If the corporation pays excessive rent, the excess could be treated as a constructive dividend rather than a deductible business expense. In other words, this isn’t an opportunity to simply set an unusually high rent amount to move more money from the corporation to yourself. The rental arrangement and pricing should have a legitimate business basis. 5. Sell property to your corporationYou may also be able to receive cash by selling property to your corporation. However, this strategy can have some unfavorable tax consequences, particularly when you own more than 50% of the corporation. For example:
The sale should have a legitimate business purpose, and the terms should be similar to what an unrelated buyer and seller would agree to. It’s also important that the corporation pay a fair market value for the property. If it pays more than the property is worth, the excess could be treated as a constructive dividend. Depending on the property and circumstances, you may need an independent appraisal to establish its fair market value. Think beyond the dividendTaking money out of a C corporation isn’t always as simple as writing yourself a check and deciding how to classify it afterward. The way a payment is structured can affect both your personal taxes and your corporation’s taxes. If you’re considering taking additional cash or benefits from your corporation before the end of the year, it’s worth reviewing the options ahead of time. Talk with us before making a move. We can help you evaluate the tax implications for both you and your corporation and review your 2026 shareholder-corporation transactions to help make sure they’re properly documented and classified. You can find a Padgett office closest to you here! The post 5 Ways to take money out of your C corporation besides a dividend appeared first on Padgett. 10/01/2026
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