Partner Interest Expense

[Harvey Lucas]

Partner A borrowed 50,000 to buy business assetts, and then contributed those assets to the ABC Partnership that was formed in January of 2008.

B and C also made contributions of assets to the partnership.

For 2008, Partner A incurred and paid 6,000 of intererst expense on the 50,000 that he borrowed.

ABC reported a 30,000 profit for 2008 and each partner will get a 1065 K-1 form indicating their share of the 30,000 profit, ie, 10,000 each, ordinary income subject to SE tax.

Partner A's 10,000 share of profits goes on his 1040, Sch E, Part II, line 28, also on sch SE.

How about Partner A's 6,000 of interest expense?

Can I list that on Sch E, Part II, line 28 also, ie, directly under his entry for his 10,000 of partnership income?

Harvey Lucas

[BHoffman]

Partner A borrowed 50,000 to buy business assetts, and then contributed those assets to the ABC Partnership that was formed in January of 2008.

B and C also made contributions of assets to the partnership.

For 2008, Partner A incurred and paid 6,000 of intererst expense on the 50,000 that he borrowed.

ABC reported a 30,000 profit for 2008 and each partner will get a 1065 K-1 form indicating their share of the 30,000 profit, ie, 10,000 each, ordinary income subject to SE tax.

Partner A's 10,000 share of profits goes on his 1040, Sch E, Part II, line 28, also on sch SE.

How about Partner A's 6,000 of interest expense?

Can I list that on Sch E, Part II, line 28 also, ie, directly under his entry for his 10,000 of partnership income?

Harvey Lucas

Hi Harvey - unreimbursed partnership expenses can be deducted by the partner if the agreement specifically allows or demands it. Otherwise, it's much better for the partner to submit an expense report to the partnership and be reimbursed.

[Gretel]

Yes, I agree, but wouldn't interest expenses for a capital (asset) contribution be treated as investment interest and go on Schedule A?

[Harvey Lucas]

In this case the

money borrowed was used for capital asset purchase, and then those assets were contributed to partnership.

My understanding is that because it is for an active operating business, it is considered business interest and not 4952/sch A Investment interest.

Also, it is not the type of expense that would be typically reimbursed by the partnership, ie, A borrowed his money to buy assets and join the partnership. However, B and C did not. B and C already had assets.

As such A has interest expense that is only an obligation of A's.

Since he has borrowed the money and used it to become involved in an operating business (thru a partnership), then it is business interest and not investment interest.

If he had used the assets to be a sole proprietor, Sch C, then the interest would go an Sch C.

I hope I have this right.

Sincerely,

Harvey Lucas

[Gretel]

money borrowed was used for capital asset purchase, and then those assets were contributed to partnership.

My understanding is that because it is for an active operating business, it is considered business interest and not 4952/sch A Investment interest.

Also, it is not the type of expense that would be typically reimbursed by the partnership, ie, A borrowed his money to buy assets and join the partnership. However, B and C did not. B and C already had assets.

As such A has interest expense that is only an obligation of A's.

Since he has borrowed the money and used it to become involved in an operating business (thru a partnership), then it is business interest and not investment interest.

If he had used the assets to be a sole proprietor, Sch C, then the interest would go an Sch C.

I hope I have this right.

Sincerely,

Harvey Lucas

Rev. Ruling 2008-38 gives a little more details and mainly agrees with you. Only if the partnership engages also in investment activities will this change.

You might want to watch for state rules. While goggeling I came across Massachusetts, which doesn't go along with the Fed. rules.