If owners of an S-Corp take part of their K-1 earnings as a 'Loan to Shareholder' how does that work? I have never heard of this before and an associate of mine was advised by his tax accountant to take part of his annual earnings as a loan. I assume to reduce his personal annual taxable income. What effect / advantages / disadvantages does this create?

I would think his company financial would show this amount as an outstanding debt. Won't he eventually have to pay this back? Does he have to pay interest to himself?

Can anyone elaborate on this strategy -- if it is indeed a strategy??

Thanks,
CSB

Bona-fide loans can be made between shareholder and S corp. Loans must be repaid and be interest bearing. Failure to repay loan will result in a taxable dividend to the shareholder from earnings and/or the IRS could recast as wages and disregard loan.

Is there a time limit on when loans should be paid? Or is that all based on terms and conditions agreed upon? Such as when company sells or closes all outstanding loans to be paid?

Yes, there is a time limit. It is what is deemed the norm for loans between two unrelated parties.