A deemed distribution is a distribution that is different from other disruptions in that the participant is taxed as if the distribution was received, but the treatment of the loan as a distribution does not excuse the participant from the obligation to repay the loan. This means that the loan will be taxed by the IRS and the participant still has an obligation to repay the loan.
Deemed Distribution Examples
Certain events may be treated by the IRS as a distribution to a shareholder, these include:
1. Below Market Loans – In the event that a corporation gives a shareholder a loan on which no interest is charged, or on which interest is charged at a rate below the applicable federal rate, the interested that is no charged may be treated as a distribution to the shareholder.
2. Cancellation of Shareholder Debt – If a corporation cancels a shareholder’s debt without repayment by the shareholder, the IRS will treat the amount cancelled as a distribution to the shareholder.
3. Transfer of Property Below FMV – A sale or exchange of property by a corporation to a shareholder may be treated as a distribution to the shareholder. For a shareholder who is not a corporation, if the fair market value of the property on the date of the sale or exchange exceeds the price by the shareholder, the excess may be treated as a distribution.
4. Unreasonable Rents – If a corporation rents property from a shareholder at above market rates, the excessive part of the rent may be treated as a distribution to the shareholder.
5. Unreasonable Salaries – If a corporation pays an employee who is also a shareholder a salary that is unreasonably high, the excessive part of the salary may be treated as a distribution.
There may be more situations that warrant a deemed distribution. It is the IRS who has the judgment in regard to assessing a deemed distribution and requiring the distribution to be taxed.