Owner Draws and Loans

The Misunderstood Tax Risk for Small Business Owners

Small business owners often treat company funds as their personal piggy bank, but failing to document draws or loans properly can lead to IRS issues.

What to watch for:

• Taking money without classifying it as payroll, distribution, or loan.
• Not charging interest or having repayment terms for owner loans.
• Failing to reflect draws in partnership or S-corp basis calculations.

Smart practices:

• Keep a formal loan agreement if you’re borrowing from the business.
• Use payroll or distributions—not casual transfers—for personal income.
• Work with your accountant to maintain proper records and avoid constructive dividend reclassification by the IRS.

Messy records can turn routine transactions into tax headaches. Clarity is protection.