Loan to Bus (HEL interest); NOL (S Corp)

[rfk]

Good Morning,

Two questions:

1) Client has taken out home equity loan and has used the monies for his S Corp. He has received a 1098 mortgage interest statement from his bank for the interset paid portion of the HE loan line of credit. Is this deductible on his S corp form as an interest expense? Also, how should he document that he is using the money for the business and taking corresponding deductions - by agreement or... ??

2) Is there an election needed to use an NOL derived for a current year, so that it gets considered in the years to come? Or is this an automatic election?

Thank you for your help?

Ray

[Bees Knees]

The loan is between the shareholder and the mortgage company. The S corp cannot deduct that interest because the S corp is not liable for the loan. The shareholder deducts the interest on Schedule A, just like any other mortgage interest.

What your client should do is draw up loan documents between himself and his S corporation that shows he personally loaned the proceeds to the S corporation. This is a separate loan from the one he took on his house. This loan should have its own pay back schedule with a reasonable interest rate. It could be identical to what the mortgage company is charging on the same money, or it could be different. The S corp then makes a loan repayment directly to the shareholder, and the shareholder then can make a loan payment to his mortgage company. The s corp cannot be making direct payments to the mortgage company because the s corp is not liable for the loan.

See TTB page 19-8 for more information on how to handle loans to S corporations.

As to the NOL election, see “How to Use an NOL” in TTB page 8-16 for how to make the election to carry the NOL forward.

[rosieea]

However, I read a tax court case some time ago, in which the court ruled that the S corp's payments directly to the mortgage company were tantamount to making the payments to the shareholder. The court allowed the loan to increase shareholder basis. If I get the time, I'll try to dig up the cite.