Interest paid for S corp investment

[Armando Beaujolais]

Client was employee of an S corporation with no ownership interest. Then the employee bought into the S corporation funded with a personal loan. Paid about $4,000 interest on the loan.

How is the interest expense treated?

I don't see it as investment interest because the property produces ordinary business income and therefore the stock is not investment property.

Any ideas?

[OldJack]

I see it as investment interest expense as he paid cash (or had it withheld from his payroll) on a loan that bought shares of stock or interest in the business. Purchase of an interest or shares of stock make it an investment interest expense on his 1040 Sch-A. The fact that he has ordinary income from his ownership or as an employee is irrelevant.

[Armando Beaujolais]

I see it as investment interest expense as he paid cash (or had it withheld from his payroll) on a loan that bought shares of stock or interest in the business. Purchase of an interest or shares of stock make it an investment interest expense on his 1040 Sch-A. The fact that he has ordinary income from his ownership or as an employee is irrelevant.

In TTB, page 4-13, "Property held for investment includes property that produces income that is not trade or business income..."

I was thinking investment interest as well to begin with. But the property produces business income. That's not property held for investment for purposes.

[OldJack]

I was thinking investment interest as well to begin with. But the property produces business income. That's not property held for investment for purposes.

Investment expense in shares of stock bought on the stock market is considered investment property expense even though the company is in a trade or business that produces business income. The only difference in this clients shares of stock and that on the market is that the shareholder has elected to pay tax on that corporation income but it is still investment shares of stock.

Investment Interest - Interest paid on money borrowed (including margin interest) to buy investment property including stocks, bonds and mutual funds.

[JON]

To lazy to look up but

you used to be able to deduct it on the Sch E for loans used to purchase S Corp stock. What I do not remember is if you had to purchase a specific % to quailify or not. You used to put in the same K-1 info and say interest on stock and record as ordinary loss.
Does age have something to do with it? Now my clients are selling, not buying.

[theresa d]

schedule E

when a shareholder uses loan proceeds to acquire an ownership interest in an s corp the interest is deducted on line 28 column h of part II sch E. on a seperate line write business interest and indicate the name of the s corp. i believe the instructions for Schedule E explain- also in the 2004 small business quickfinder book.

[OldJack]

Well I learn something new everyday! Theresa D is correct inthat you can deduct the interest on a loan to purchase S-corp stock on form 1040, Sch-E, Page 2, Line 28, by writing "Business Interest" and the name of the entity in column (a) and the amount in column (f). 2005 Small Business Quickfinder Handbook, page D-5.

[JON]

Id#

Make sure you use the S Corp's ID number. It will appear twice, but tags why.....

[Armando Beaujolais]

You guys are good.