What makes the IRS automatically suspect that a loan may not be a true loan?
Answer: The loan is suspect when you make that loan to your wholly owned corporation or to your brother, mother, or grandfather.
If the loan is not a true loan because you improperly documented it, executed it, or otherwise failed to prove loan status, then it is a fake loan for tax purposes.
Fake Loan to Your Corporation
The problem with a fake loan to a corporation or other business entity that you own is that the dollar amount of the fake loan becomes a capital contribution.
Fake Loan to Your Mom
If you make the fake loan to your brother or mother, it becomes a gift for tax purposes.
When you make a valid loan that does not get repaid, you deduct your loss in full as a bad debt.
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