Loans when going from S Corp to C Corp

[Guest Tamra]

Client is an S Corp with a 401(k) PS Plan.

They are considering converting to a C Corp.

After conversion, would the sharelholders be permitted to take participant loans against

accounts attributable to contributions

while an S Corp? Or only against

money contributed while a C Corp?

[davef]

I have never seen any rules that look to when the dollars were deposited in determining how much can be loaned. I think you only look at the type of entity at the time the loan is made and the ownership status at the time the loan is made. For example, turning the facts around, if a corp went from a C corp to an S corp and there was an outstanding loan to a shareholder-employee, there would be an "instant" prohibited transaction created unless the loan was repaid prior to the conversion. In that case, the prior loan would not be permissible in the future, even though it was OK at the time it was made. Also, future loans under the S corp to a shareholder-employee could not be made from deposits made while a C corp.