Is this personal interest or C corp int?

[equinecpa]

I have a client who has operated his business as a sole proprietorship for several years. Last year he set up a C corp and LLC. The LLC holds the real estate part of the business and leases it to the C corp.

My client refinanced the note on the real estate last year, and in the transaction approximately $100,000 of the 1 Million went into the C corp as working capital (stated right on the closing statement).

I'm wondering where the interest related to the $100,000 should be claimed-in the C corp or the LLC (which is a disregarded entity for tax purposes)? To complicate matters I believe the note is paid out of the C corp and classified as rent.

[DMICPA]

Interest and Related

It would seem to me that the entire transaction(s) should be reviewed.

If the C is renting from the LLC, there should be a lease agreement and fair market rent charged to the C corp. The C should not pay the mortgage directly, that is what the LLC is supossed to do. The C pays rent to the LLC, the LLC pays the mortgage payment and deducts the mortgage interest.

The $100,000 that was infused into the C from the refinancing would be a loan from the shareholder or contributed capital to the C corp. depending on the intent of the parties. Is this loan going to paid back?

If it is indeed a loan from the shareholder, again an agreement should be drawn up with the terms between the shareholder and the C Corp. I would think the interest income to the shareholder-lender would be investment interest.

It is essential to keep things at arms length to prevent an attack on the "corporate veil"

Bob

[Burke]

I have a related question. LLC operated as a partnership bought old farm for $196,000 back in 2002, subdivided, and sold off lots. Basis has been reduced and deducted upon each sale until remaining property (which will not be subdivided, but used personally by the partners) now has basis of $75,000. Mortgage was paid off when lots were sold. Last year, they remortgaged property for $300,000 in the name of the partnership, each partner took 1/2 of proceeds. Is the interest deductible by the partnership? All of it? One partner plowed funds into another business. Don't know what the other partner did with his portion.

[Davc]

Interest on money borrowed to make distributions to the owners is not deductible at the entity level. At the 1040 level the normal tracing rules apply.

[Burke]

I suspected as much. Thank you for the backup.