Dear Bryan,
Thank you for your question and subscription to the PowerHomebiz.com
newsletter.
The stock of an S corp may not be held by a self-directed IRA.
Alternatively, it may be possible for a self-directed IRA to make a loan to
an S corp. BUT, if the loan is made to an S corp (or any other entity) that
is owned 50% or more by you or a "disqualified person" as defined by the
IRS, this would be considered a "prohibited transaction." The penalty for
such a prohibited transaction would be a determination by the IRS that the
IRA has been fully distributed and the imposition of taxes on the value of
the IRA.
One workaround might be to have the self-directed IRA make a loan to
someone you trust--someone who does not fit the definition of a
"disqualified person"--who would then make a loan to your S corp.
Disqualified persons include but are not limited to your "spouse, ancestor,
lineal descendant and any spouse of a lineal descendant." For a full
definition of the term "disqualified person", see Section 4975 of the
Internal Revenue Code (
http://uscode.house.gov/download/pls/26C43.txt ). This
can be a risky approach, however, because if the transaction is handled
improperly, or if it could be argued that the transaction involves the
fiduciary's indirect benefit or conflict of interest, it could be found to
be a prohibited transaction regardless of whether or not the loan was made
to a disqualified person.
Another solution might be to apply for an exemption--that's right, an
exemption--which would allow your self-directed IRA to make a loan to your S
corp. Not too many advisors know this, but there is a provision in the
Internal Revenue Code that gives the Secretary of Labor the power to grant
exemptions to the prohibited transactions rule (see Section 4975(c)(2) of
the Internal Revenue Code)--and the Secretary has issued both blanket
exemptions and individual exemptions numerous times. For more information,
you can contact the Department of Labor or visit the DOL Web site at
http://www.dol.gov .
You should seek out the assistance of a tax or financial advisor who is
knowledgeable in this area. If you do decide to go with a self-directed IRA,
the time it will take to set up will depend on the financial institution
and/or brokerage firm. Do not be surprised, however, if the whole process
(setting up the self-directed IRA and having the funds transferred from the
old account to the new one) takes 4-6 weeks.
Chrissie
Best of luck!
Chrissie Mould
About the PowerHomeBiz.com Guide:
Chrissie
Mould has over a decade of experience in business administration and
startup business consulting. As a startup business consultant, she helped
launch companies in the IT, consulting and telecommunications industries.
Prior to that, she held senior management positions at several public and
private companies, overseeing corporate administration and governance
issues. She is an incorporation specialist and CEO of New Ventures, LLC. The
company provides low-cost incorporation services to entrepreneurs and small
businesses. Visit www.MyNewVenture.com
to incorporate or form an LLC.
The opinions expressed in this column are those of the
author, not of PowerHomeBiz.com. Users should not treat the Guide's response as
legal, accounting, or professional advice as all answers are intended to be
general in nature. Such advice can only be properly given by qualified
professionals who are fully aware of a user's specific geographical areas or
circumstances, such as an attorney or accountant.
