Interest deduction?

[TAX4US]

TP borrows 1.18m. Takes 280k and buys out remaing shareholders in an S corp. He is now sole shareholder. Takes 600K buys a building to put a similar business in. Takes 300k to renovate bldg and buy equipment to open with. Remainder used as operating expenses. Building and land colateral for loan. Operating similar business as a schedule C. 2 questions: what can I do with interest on the 280k and can I componet depr the improvements/repairs to building? Many thanks.

[DaveinTexas]

To save a bit of time on the response

TP borrows 1.18m. Takes 280k and buys out remaing shareholders in an S corp. He is now sole shareholder. Takes 600K buys a building to put a similar business in. Takes 300k to renovate bldg and buy equipment to open with. Remainder used as operating expenses. Building and land colateral for loan. Operating similar business as a schedule C. 2 questions: what can I do with interest on the 280k and can I componet depr the improvements/repairs to building? Many thanks.

This is a great article regarding equity financed interest: http://taxhub.net/Interest-Incurred-...eficiency.html

A summary is the interest on the $280K will be treated as business interest (deducted on E Part 2 as Business Interest Expense, line h) if the underlying assets of the S Corp are business and not investment type assets, and the new shareholder generally must materially participate in the activity. If the new shareholder does not actively participate, his interest deduction on the $280K may be limited.

The second part of your question, I assume, refers to a cost segregation analysis of the building to accelerate the depreciation on the various class lives of the buildings components. Be careful with this, new regs have been issued affecting the class lives of commercial property's major components. I don't have a cite but I would recommend your client consult with a cost seg specialist so a third party is relied upon. Some even will defend the analysis in the event of an IRS audit.

[taxea]

Bonus Depreciation and cost segregation have options based on listed requirements. Some of the things you want to research are difference btwn acquired prop. and self-constructed; improvements on purchased building; special election rules.

I too would recommend a cost seg. specialist....look at REG 168 (k) etc and google KBKG if you want to see what seg specialists provide.