This chapter talks about an employer providing loans to executive employees. Such a benefit may be provided for a number of reasons, but rarely on a carte blanche basis. The biggest advantage is the convenience of the executive. The biggest disadvantages relate to administrative costs and tax treatment. Tax implications are discussed. | What is it? When is it indicated? Employers can make loans available to executives for specified purposes When executives need cash to meet needs in special situations Copyright 2009, The National Underwriter Company Common Loan Situations A mortgage or ‘bridge’ loan when executive is relocating College or private school tuition for members of executive’s family Purchase employer stock Meeting extraordinary needs (. medical, tax, etc.) Purchase life insurance Complete expensive purchase (. car) Copyright 2009, The National Underwriter Company Advantages No tax advantages but usually cash is made available at favorable interest rates Some loans exempt from complex tax rules for “below market loans” Employer’s costs for making loan usually low Employer can discriminate regarding term, amount, condition of loans Copyright 2009, The National Underwriter Company Disadvantages Complex tax rules for ‘below-market’ loans Unfavorable tax treatment of term loans; employee must include substantial portion of loan in income at times Employer must bear cost of loan administration loan default Copyright 2009, The National Underwriter Company Tax Implications If loan is below market compensation related a demand loan Interest is treated as 3 transactions – the actual transaction plus 2 ‘deemed’ transactions Copyright 2009, The National Underwriter Company Tax Implications Actual transaction: Interest actually paid by borrower is taxable income to company (lender) and may be tax deductible by borrower, subject to usual limitations on interest deductions Copyright 2009, The National Underwriter Company Tax Implications “deemed transactions” Employer treated as if paid additional compensation to employee equal to difference between actual rate of interest and “applicable federal rate” this “additional compensation” is tax deductible to employer taxable income to employee Copyright 2009, The National Underwriter Company Tax Implications “deemed . | What is it? When is it indicated? Employers can make loans available to executives for specified purposes When executives need cash to meet needs in special situations Copyright 2009, The National Underwriter Company Common Loan Situations A mortgage or ‘bridge’ loan when executive is relocating College or private school tuition for members of executive’s family Purchase employer stock Meeting extraordinary needs (. medical, tax, etc.) Purchase life insurance Complete expensive purchase (. car) Copyright 2009, The National Underwriter Company Advantages No tax advantages but usually cash is made available at favorable interest rates Some loans exempt from complex tax rules for “below market loans” Employer’s costs for making loan usually low Employer can discriminate regarding term, amount, condition of loans Copyright 2009, The National Underwriter Company Disadvantages Complex tax rules for ‘below-market’ loans Unfavorable tax treatment of term loans; employee must
