Discussion:Investment Interest Expense
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Discussion Forum Index --> Tax Questions --> Investment Interest Expense
| 29 March 2006 | |
| I have a client who borrowed $200,000 from his equity line and used the proceeds to buy 60% shares of an S corporation. This S corporation has been profitable. Is the interest deductible as investment interest expense? | |
| 29 March 2006 | |
| See Russon v Commissioner. I think deductible but not investment interest--not limited to investment income. | |
| 29 March 2006 | |
| Ok I didn't remember it precisely right, but...
Treasury Regulations, Subchapter A, Sec. 1.163-8T Or in simpler terms, interest on debt used to acquire an ownership interest in a pass through entity in which you materially participate is deductible as business interest to the extent of business income. | |
Thanks for the advice. Is this business interest a deduction on schedule A or somewhere else?
| 3 April 2006 | |
| If he owns 60% of an S-Corp the 200K is his basis, the interest is business interest paid on the S-Corp return and he gets a K-1 with figures that flow thru to his individual return. | |
| 3 April 2006 | |
| I doubt that the interest would be investment interest. You would need to look at the underlying assets of the S corporation. If the S corporation and the shareholder are engaged in an active trade or business, then the interest is deducted on page 2 of Sch. E as a non-passive deduction. | |
| 3 April 2009 | |
| Facts:
Materially participating (and approx. 20%) shareholder borrows money from s-corp to buy stock in said s-corp. S-corp is accrual basis and accrues interest income on note accordingly each year. Shareholder IS making payments, so no issues there. Interest income passed through to shareholder via K-1. Follow-up question: I understand that the shareholder's interest on this note should be deducted on schedule E. Does the shareholder deduct it at the amount accrued by the s-corp or at the actual amount paid (the portion getting applied to accrued interest, of course)? For example the loan begins June x and shareholder doesn't makes payment until june x1 for all interest accrued through date paid. Does shareholder get 6 months of accrued interest deduction in yr x and the other 6 in x1, or deduction only in year x1 when paid? Secondary question: If shareholder is 20% owner, does the interest (paid or accrued, depending on answer to above) get deducted on schedule E at 20% since he's only getting 20% of the interest income reported by the s-corp on his k-1? I've looked through Schedule E instructions and founding reference to pub 535, but that didn't provide much help. I realize I'm responding to a thread a couple years old, but I didn't see much point in starting a new one when my questions directly related to this. Thanks for the help. | |
Harry Boscoe (talk|edits) said: | 4 April 2009 |
| Responding to the replies to the OP's question about interest on the $200,000 borrowed and used to buy a 60% interest in an S corporation:
1.) How did the shareholder's interest [paid by the shareholder...] get onto the S corporation books?? 2.) Did the 1.163-8T regulation *really* say the business interest deduction was limited to the business income? | |
