Investment Interest

[Nashville]

Form 4952 and (subject to conditions) deductible as an itemized deduction.

MakeAWish, LLC files as a partnership, is heavily in debt, but after paying significant interest still turns a profit. There are five equal partners but two of them are not active. The two "inactive" partners should receive their share of "investment interest" on their K-1. The three "active" partners each receive a salary and the partnership deducts their salary as a deductible expense.

Question: for the "active" partners, is their share of the interest considered "investment interest"?

[Koss]

Investment Interest

Why is it treated as investment interest at the partnership level?

Did the partnership borrow money, and use the proceeds to make investments?

I'm not trying to be funny. I guess I'm not sure exactly what we're dealing with here.

If the partnership borrowed money to pay operating expenses, then I don't think that's investment interest.

If the partnership borrowed to invest in real estate or something, then wouldn't that interest be deducted at the partnership level, without passing through on Schedule K-1?

BMK

[Nashville]

Clarification

Burton, I must confess this is the first time you have had more questions than answers!

All joking aside, this must be because I did a poor job of communicating. It is not "investment interest" at the partnership level, it is simply interest on loans to finance operations. Just plain ol' interest expense. Borrowing money for the partnership to survive through tough times.

Does this mean that the interest is simply deductible to arrive at operating income, and is not "special" interest to be recategorized as "investment interest?"

If this is correct, I've just answered my own question.

Oh, and more thing...Go Wolverines!!!

[Koss]

Interest Expense

You can deduct interest on line 15 of Form 1065 if it is interest that is "incurred in the trade or business activities of the partnership."

Line 15 is not used for interest on debt that is used to buy rental property, or for interest on debt that is used to buy property held for investment (e.g., stocks, bonds, artwork, antique rifles...).

See the instructions for Form 1065.

BMK