Tax Consequences of Guaranteeing a Corporate Loan
Posted by Angela Miles on September 29, 2025
If you’re considering guaranteeing a loan for your closely held corporation, it’s important to understand the potential tax consequences before you sign on the dotted line. Acting as a guarantor, endorser, or indemnitor means that if your business defaults, you could be personally responsible for repaying the loan. This can have significant financial and tax implications.
What Happens If the Business Defaults?
If the corporation cannot meet its obligations and you step in to make good on the debt, the payment of principal or interest generally results in one of two outcomes for tax purposes:
- Business Bad Debt Deduction
- If the debt is considered a business bad debt, it can be totally or partially worthless.
- The advantage? It’s deductible against ordinary income, which can provide meaningful tax relief.
- Nonbusiness Bad Debt Deduction
- If the debt is classified as a nonbusiness bad debt, it’s deductible as a short-term capital loss.
- This deduction is subject to certain limits, which may reduce its overall benefit compared to a business bad debt deduction.
Why Classification Matters
The distinction between business and nonbusiness bad debt is critical because it determines how much you can deduct and how it offsets your taxable income. Misclassification could mean leaving money on the table—or worse, facing unexpected tax liabilities.
Plan Ahead for the Best Outcome
Before guaranteeing a loan, consult with a tax professional at Lumsden McCormick to ensure you understand the implications and structure the arrangement in a way that minimizes risk. Proper planning can help you achieve the best possible tax results and protect your personal finances.
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As a manager in the tax department, Angela performs tax compliance services for businesses and individuals with specialized knowledge of manufacturing businesses and the nuances of state and local tax (SALT).