Discussion:INTEREST EXPENSE DEDUCTIBILITY
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Discussion Forum Index --> Tax Questions --> INTEREST EXPENSE DEDUCTIBILITY
RON CARMARK (talk|edits) said: | 1 September 2006 |
| If a taxpayer personally borrows money from a bank, and then turns around and loans that money to an "S" Corporation that the taxpayer owns, where would you deduct the interest expense on the loan from the bank?
The "S" Corporation's primary lender wanted the shareholder to have more money invested in the "S" Corporation, even if it were an officer loan. I would prefer to deduct the interest on Schedule E as opposed to Schedule A as investment interest. Is it trade or business interest deductible on Schedule E? | |
| 1 September 2006 | |
| The interest is deducted according to the tracing rules for pass-through entities. In other words, if the underlying assets of the S corporation are trade or business assets, then you would be correct in deducting the interest on Sch. E. | |
RON CARMARK (talk|edits) said: | 3 September 2006 |
| THANK YOU RILEY. IT WOULD BE DEDUCTIBLE ON SCHEDULE E BECAUSE IT WOULD BE AS RILEY SAYS RELATED TO A TRADE OR BUSINESS.INVESTMENT INTEREST RELATES TO BUYING STOCKS AND OTHER SECURITIES SUCH AS A MARGIN ACCOUNT. | |
| 4 September 2006 | |
| Lois, we are required to allocate interest incurred to acquire or carry an interest in a pass-through entity in accordance with Notice 89-35. Notice 89-35 forces us to examine the nature of the assets owned by the S corporation in order to properly allocate the interest expense. For example, if the underlying assets of the corporation are trade or business assets employed in a business in which the shareholder materially participates, the interest would be deductible on Schedule E. On the other hand, if the assets of the corporation are portfolio assets such as stocks and bonds, the interest expense would be deductible as investment interest expense on Schedule A. | |
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