S Corp and Shareholder Loans

[S T]

Shareholders took out personal loans (equity lines) and loaned to S Corp. S Corp issued checks for payments on loans. Where to deduct the interest?

S Corp is general partner in LP, shareholders of S corp also made loans to LP direct without going through S Corp, how to treat the interest?

I am not having fun!!

Sandy

[lsmith]

Loans

Made by S Corp sh and repaid by the S corp. Treat as assignment by sh to corp and deduct on corp return. Loans to LP the same way. Obviously, the loans should have been structured in the name of the S Corp alone, but you know how tax clients are, they make you earn your fee. I would also have statements in the minutes of the S corp stating the assignments.

[OldJack]

smile

The shareholders were smart to take out the loans personally and then make a personal loan to the S-corp and LP. You must properly document such shareholder loans with interest if more than $10,000 (if nothing else just have client write an IOU on toilet paper). This loan gives the shareholder basis to deduct losses that otherwise they may not if the loans were made direct by the bank to the business.

Interest on the loans should be deducted by each entity that got the use of the money.

You will have more fun after you sit back and look at your charge to the client!! :-) <smilie>

[theresa d]

2 loans?

aren't there two loans in this situation? the first loan is the loan the shareholder took out and the proceeds were then loaned to the corp-2nd loan the loan the corp has to the shareholder. the corporation would pay interest to the shareholder on this corporate loan and the shareholder would pick this interest up as income-so the two wipe each other out on the shareholder personal return.the benefit is the shareholder has increased basis. however where does the shareholder deduct the interest on the personal loan they took out and lent the proceeds to the corp. is it deducted as a seperate line on schedule E? can't deduct as investment interest if they do not have investment income to offset. another option is possibly home equity debt but if loan exceeds $100,000 it would not be deductible. any thoughts?

[OldJack]

the corporation would pay interest to the shareholder on this corporate loan and the shareholder would pick this interest up as income

can't deduct as investment interest if they do not have investment income to offset.

You said the corporation paid the shareholder interest on the loan and that is investment income usable to deduct investment interest.

[Gretel]

Wait a minute. Some weeks ago I had a question about investment interest in regards to S-Corp. S/H. The outcome was that it is only investment interest if used for stock purchase or add. paid in capital not if it is a loan to S-Corp. Maybe I misunderstood.

[OldJack]

I was wrong.

Well Gabriele...I think you are right as far as deducting interest paid on 1040 Sch-A but as I recall it is deducted as loan interest paid on 1040 Sch-E, page 2, against the S-corp income and effectively nets the interest income on 1040 page 1. I guess you don't actually call the interest income as investment income as that is not where it is needed anyway if you don't itemize. Sorry for the incorrect statement.

edit: Actually.. the interest income is investment income its just that the interest expense is not investment expense for Sch-A.

[S T]

Shareholder Loans

I thought I understood after the first 2 postings, but now I am confused after some of the subsequent postings.

Shareholder loans S Corp $75,000, and S Corp then loans LP $75,000. LP makes payments back to S Corp and then S Corp makes the loan payment of Shareholder (Equity Line) directly to the bank. So what would the entries be for the interest deduction.

Secondly, shareholder of S Corp made another direct loan of $70,000 to LP. LP is making direct payments to the Bank on this loan. So what would the entries be for the interest deduction.

Shareholder has received the 1098 mortgage interest statement. Do any entries have to be made on the Sched A or form 4952? or income on Sched B.

Thanks

Sandy

[OldJack]

1.Transactions on the LP form 1065:
1a). Interest expense deduction for payments on each loan to S-corp and Shareholder loan #2.
1b). Principal payments to reduce each loan payable to S-corp and Shareholder loan #2.

2.Transactions on the S-corp 1120S:
2a). Interest income from LP.
2b). Interest expense deduction for payment to Shareholder loan.
2c). SH Loan decrease or (cash/property distributions) for principal payments to Shareholder (for direct payments to bank).

3.Transactions on the 1040:
3a). Interest Income on 1040 Sch-B from S-corp and LP.
3b). Business interest expense deducted (for 1098 amount) on 1040 Sch-E, pg2, where net income from S-corp and LP are reported.

Form 4952 not used (investment interest expense deduction),
1040 Sch-A, investment interest expense, not used.

[S T]

Many Thanks

Thanks Old Jack,

This really, really helps.

Sandy

big smilies

[theresa d]

great clarafication

old jack- that is a great clarafication! i too was somewhat confused concerning the proper handling of shareholder loan interest . thanks for finally giving us a definitive answer.

[S T]

You just don't know

Old Jack, Theresa and others,
You just do not know how much this post assisted me. Dealing with an LP to an S Corp and then to the personal tax return, my desk is in an array of paper work, and I totally lost the trail of entries.

Thank you so much for the posting of the entries. I have printed to add to my TB for future reference as I am sure this situation will arise again.

Sandy

[OldJack]

Glad I was able to help! Of course there are other debits and credits to the entries to cash and loan payables, etc., but you get the idea. Don't let it get complicated. :-) <smilie>

[S T]

Other dr and cr

Hi Old Jack,

I just got so "befuzzled" with all of the entities and the moving of the money, that I couldn't figure out the entries, so you were a "huge" help.

I think I have the other dr and cr, just problematic in dealing with the LP, S Corp and the shareholder, since the client believes that they are all one in the same. The only thing I have going for me is that at least I have separate bank accounts for each, separate accounting and a lot of backup up paperwork such as interest statements, etc!! so they might not have moved money around quite like they should have, but I think I have the startings of an audit trail and could explain if I had to.

I have spent most of the afternoon correcting the dr and cr entries in both the LP and the S Corp, to have it make some sense and balance accounts from one to the other entities and try to arrive at a "normal" balance sheet and "profit and loss".

Again thank you!

Get this one done, and I have another similar situation with another client!


Sandy

[theresa d]

great forum

sandy glad it worked out. isn't this a great forum for helping us weed through those situations which just get lost in detail. i find it so helpful to have other professionals which are willing to share their knowledge!!