Intercompany loans and due to / due from accounts

What is an intercompany loan?

It is a loan between two entities you control. Common cases in a multi-location group:

• A parent or management company funds the opening of a new location's LLC.
• One location covers another's shortfall in a slow month.
• A location's customer payments land in another entity's account and are owed back until transferred.

Each is an intercompany transaction. It is called a loan when the money is meant to be repaid over time, rather than settled at month end.

What are due to and due from accounts?

They are the pair of balance sheet accounts that record money owed between entities:

• Due from [entity] is an asset in the lender's books: the amount the other entity owes it.
• Due to [entity] is a liability in the borrower's books: the amount it owes the other entity.

Use one pair per counterparty, so each balance shows who owes whom. When Denver Holdings lends Boise LLC $40,000 to open, Denver Holdings records Due from Boise LLC $40,000 and Boise LLC records Due to Denver Holdings $40,000. The two must always agree. Checking that they do is the intercompany reconciliation.

Is an intercompany loan a loan or a transfer?

Decide and document it when the money moves. A loan is expected to be repaid, often with interest. A capital contribution from a parent is not repaid. Each is recorded differently and can have different tax effects. A written agreement, often a promissory note, states the principal, the interest rate, the repayment schedule and what happens if a payment is missed.

Do intercompany loans need interest?

The IRS can require it. Treasury regulation 1.482-2(a) covers loans and advances between members of a group of controlled entities. If the lender charges no interest, or a rate that isn't an arm's-length rate, the IRS may adjust it. An arm's-length rate is one that was charged, or would have been charged, between unrelated parties in comparable circumstances. The regulation names factors such as the loan's size and duration, security and the borrower's credit standing.

For qualifying loans, the regulation sets a safe haven range: not less than 100% and not greater than 130% of the applicable federal rate. The IRS publishes those rates every month.

What about amounts owed from ordinary sales between entities?

The same regulation gives intercompany trade receivables an interest-free period. Interest isn't required until the first day of the third calendar month after the month the receivable arises. A shared-services charge billed by one entity to another in March, for example, doesn't need interest before June 1 under that rule. Longer periods apply in some cases. Your CPA can tell you which ones fit.

How should a group manage intercompany loans?

• Write every loan down before the money moves.
• Record both sides on the same date, for the same amount.
• Keep loans in their own due to and due from accounts, apart from month-end settlements.
• Repay by real bank transfers, so there is a record that matches the entries.
• Remove the balances when combining the entities' results. See multi-entity accounting.

General information, not accounting, legal or tax advice. How these rules apply to your group depends on its structure.