I'm the bookkeeper for a small, privately owned, company. When the owner originally purchased the company, he borrowed money from Joan (his mom) as well as his personal finances. These loans were booked (in QuickBooks) as two separate Notes Payable. Now the company is going out of business. The owner will be personally responsible for an SBA loan and other payables. This weekend, the Owner "modified the loans" (as he puts it) and moved the dollar amounts in the Notes Payable accounts into the Equity account on the books. The result was the Notes Payable accounts were zeroed out and the Equity account reflects an additional $80k. Is this wrong? Is this illegal? He obviously did this for tax purposes. How concerned should I be?
Thank you

You are not responsible for how the owner arranges his books, you are only a bookkeeper. You just record what he wants you to do. Just do your job and leave at the end of the day.

Tick

Actually what the owner did was okay. In actuality, the money will not be repaid by the company so it really was never a loan (backed by recent IRS court decision), it was additional capital paid in. Reclassifying the payable into capital is exactly how it needs to be. He doesn't get any tax break for putting money into a dying business. How he settles up with his mom and the money she loaned to him, is between the two of them.

Booky,
Can you site the recent IRS court decision? I'm actually dealing with the same situation. Thanks.

Put simply, notes payable is a liability which could not be termed as capital. But a loan by a family member does not stand to be a liability if there were no intentions to be bound into legal relation, this way the treatment could be justified.

Can you reclassify a bank loan as an adjustment on the income statement?

This isn't a bank loan.