. . . plus travel deductions, interest deductions, and a tax on retained earnings

Company Loans
Before you or other shareholders borrow from your company, you should realize that, from a tax standpoint, a whole list of rules comes into play.

One that can create a tax disaster has to do with below-market interest (BMI) loans, those that charge no interest or interest below the current market rate (CMR). The difference between the CMR interest and the BMI interest is called "forgone interest." Though it is a fiction, it is treated as a dividend to the shareholder, who is then considered to have paid the forgone interest back to the corporation.

Generally, the shareholder can deduct only 40% of this imputed interest in 1988 (see "Interest Deductions," below). And the corporation is stuck with interest income from the imputed interest and a nondeductible dividend from the foregone interest.

To avoid this problem, make your loans at market rates. But that's only rule number one.

Also, execute legally binding notes for all advances. Indicate the required interest rate on the face of all notes evidencing the loan. Specify the repayment dates and make payments when due with a personal check. Do not make offsetting book entries. Provide security, if possible. If loans are made to more than one shareholder, do not make the loans in proportion to the shareholders' interest in the corporation. Finally, enter the transaction on the corporate books as a note receivable from its inception and so state in the corporate minutes.

Travel Deductions
A rundown of post-tax-reform deductions for travel:

* Business travel. Business trips are fully deductible (except expenses for meals and entertainment, which are 80% deductible). You can deduct the cost of your spouse's travel only if his or her presence has a real business purpose -- such tasks as answering the phone or typing won't do. Examples of what works: if you jointly own the business, or if the trip is to a country where your spouse speaks the language and you don't.

* Luxury water travel. Special rules apply to business travel by ship. You can deduct twice the highest daily allowance for U.S. travel by federal government employees, which is currently $126. That gives you a deduction of $252 per day. The 80% rule for meals and entertainment doesn't apply if these expenses are not itemized on your tab for the cruise.

* Travel for education. If the cost of a business-education seminar is deductible, so is the cost of getting there and back. (Only costs of seminars relating to your trade or business are deductible, which excludes investment seminars.)

* Travel for charity. You can claim a charitable deduction for the cost of traveling on behalf of a charitable organization. But the deduction is barred if the trip involves a significant element of personal pleasure, recreation, or vacation. If a trip qualifies, all related costs are deductible, including 100% of your meals.

* Travel for medical reasons. You can deduct the cost of travel for medical reasons, but only if your medical expense deductions exceed 7.5% of your adjusted gross income. When a patient is too young or too ill to travel alone, the cost of a traveling companion is deductible. Meals are not deductible, and lodging expenses, if essential to receiving medical treatment, are limited to $50 per night.

Interest Deductions
Here's a summary of what you can deduct:

* Business interest. You can deduct 100% of interest on business debt.

* Mortgage interest. The interest on mortgage loans of up to $1 million and an additional $100,000 of home equity loans is fully deductible. Interest on debt greater than these amounts is considered consumer interest (see below).

* Investment interest. This is the interest you pay to carry investments, such as interest on a margin account to carry stock and bond investments. You can deduct the investment interest, but only up to the amount of your investment income, which includes dividend and interest income and profits on the sale of securities. Investment interest deductions are being phased out, as follows: 40% can be deducted this year; 20% for 1989; 10% for 1990; and 0% for 1991 and later.

* Consumer interest. Interest that does not fit into one of the above categories is considered consumer interest, and includes such items as interest paid on a student loan, an insurance loan, credit card balances, or to the IRS. Consumer interest is being phased out at the same rate as investment interest (see above).

A Success Tax
The IRS frowns on closely held corporations that it suspects are being used to prevent income from flowing to shareholders as dividends, which brings us to the Accumulated Earnings Tax.

If your corporation has "unreasonable" accumulated earnings, the penalty tax is 27.5% on the first $100,000 over $250,000 and 38.5% on the remainder, in addition to the regular corporate income tax.

What's unreasonable? Every corporation is allowed accumulated earnings of $250,000 ($150,000 for personal-service corporations). Even if you're over this allowable minimum, you still may get out of the tax if you can show that the earnings were accumulated for reasonable business needs. Like many areas of the tax law, the answer turns on the particular facts and circumstances of each case.

Irving L. Blackman, specializing in closely held businesses at Chicago-based Blackman Kallick Bartelstein, certified public accountants, speaks and writes on tax issues.

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Excellent 17%

Good 21

Fair 18

Poor 39

Don't know/

not stated 5

Source: Internal Revenue Service Document 6011, revised 5-88. Data based on 1986 survey.