Question

What is a deemed distribution?

Answer 1

Deemed Distribution is a distribution wherein the loan treated as a distribution and is taxed as if it is received but the obligation to repay the loan still prevails. Though the loan will be taxed by the IRS , the participant still has the obligation to repay it.

Deemed distribution arises in following circumstances:

1.When shareholder receives loan with zero interest or interest below market rate , the no charge will be considered as distribution.

2.Cancelled debt of shareholder will be considered as distribution.

3.Excess of Fair market value over sale or exchange price of any asset to shareholders will be considered as distribution.

4.When rent paid to shareholders above market rates the excess will be considered as distribution.

5.Unreasonably high salary paid to shareholders , the excess part will be considered as Deemed Distribution.