In the current year, Madero Corporation made a $400,000 interest-free loan to Francisco Madero, the corporation's controlling shareholder.
Mr. Madero is also the corporation's chief executive officer and receives a salary of $300,000 a year.
What are the tax consequences of classifying the loan as a compensation-related loan rather than as a corporation-shareholder loan?
Select either "True" or "False" for the following statements regarding the classification of the loan as a compensation-related loan.
• The corporation must recognize imputed interest income.
Francisco's deduction for the imputed interest paid is dependent upon how he used the
borrowed funds.
• The corporation will be allowed to deduct imputed compensation expense.
The corporation will have an imputed, nondeductible dividend paid to Francisco since he
is a shareholder.