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Discussion:C-corp purchased stock (small business) with loan

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Discussion Forum Index --> Advanced Tax Questions --> C-corp purchased stock (small business) with loan


Discussion Forum Index --> Tax Questions --> C-corp purchased stock (small business) with loan

Tdinter1 (talk|edits) said:

3 March 2008
If a c-corp is purchased with a loan, meaning the whole stock in the business is purchased with a loan, theoretically, the recording JE would look like this:


Debit: Equity $Value of stock purchased
Credit: Note Payable $Loan proceeds

Does this mean there is a negative equity in this corporation?

JR1 (talk|edits) said:

March 3, 2008
Well, teasing this out, the corp doesn't make that entry if you're talking about an existing corp. The owner's books would show that entry. It's outside the corp.

Tdinter1 (talk|edits) said:

3 March 2008
I see what you're saying.


But, what would the effect be if the corp was making the payments on the loan on behalf of the shareholder that took the loan out in order to acquire the business?
That's where my question comes in if it's possible for the shareholder to have negative equity in the business.
I feel like the solution is really simple and it's staring me in the face, but I just am hitting a major speed-bump.

JR1 (talk|edits) said:

March 3, 2008
Thinking out loud....you've got an existing corp, and you insert debt into it. So the s/h has debt relief? Taxable? Clearly, many times we'll make the loan payments out of the corp, and in an S it's a push to s/h loans and the interest is fully deductible no matter what. With a C tho', you're trying to turn investment expense into business expense, and you don't have a mechanism for the s/h to take that personally when you pay it out of the C. Making them dividends, in that case, and does that offset the investment interest expense? Kind of out of my element there, C's and investment interest. But I think you're trying to do something that you can't.

Now, I watch and learn from others on this.

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