Owner took a distribution last year of over $100,000 then found out she couldn't do that and deposited all of it with Lost Earnings into the plan. It was reported as a prohibited transaction on form 5330, I believe in the form of a loan. Owner would now like to take out a loan of the maximum $50,000 with the understanding that she must treat it as a loan. Since the prohibited transaction was within a year, would there be any affect on the maximum loan she can take? In this case, it would be zero since it exceeded $50,000.

Seems to me if the distribution was reversed and the funds reinstated (rather than returned as a loan payment to payoff the loan) then it should be treated as though the original distribution did not occur, and loan availability should exclude the original distribution.

If the $100,000 was treated like a inservice distribution that was not allowed, I agree with forksnknives. There is no previous loan balance. FWIW