Medical practice corporate loans to employees – How to book interest at year end

Small physician practices (and even some large ones) every now and then extend loans to an employee, including a physician owner-employee. So in these instances, how do you book the interest at year end? It depends partly on the kind of loan.

A demand loan is one that is payable in full when the lender demands it. Here, the trick is properly recording the unpaid interest. Suppose a corporation makes an interest-free or below-market demand loan to an employee. Each Dec. 31 thereafter, the imputed interest—the interest the employee would have paid if the loan was from a bank or other creditor—must be booked as compensation to the employee. The Practice treats the imputed interest as a deduction for compensation expense and as interest income at the same time.

If the demand loan is paid in full during the calendar year, the imputed interest “payments” are recorded on the date of repayment rather than on Dec. 31.

A term loan. A corporation may make an interest-free or below-market term loan to an employee and impute interest. If, however, employment-related conditions are attached, such as accelerating the due date if the employee terminates, or requiring cash payment of the fair-market interest upon termination, the loan is treated as a demand loan to determine the timing and character of imputed transfers. In other words, the imputed interest “payments” (transfers) are considered made on Dec. 31, as mentioned above.