Pass-through entity interest income

[RightOn]

A S-corp received interest income from three different sources in 2014:

(1) Interest income from bank deposit.

(2) Interest income from a loan to a non-shareholder (who is not related to the S-corp).

(3) Interest income from a loan to the 100% owner/shareholder. I think it is called self-charged interest income.

I am pretty sure (1) and (2) should be reported on Form K-1 to pass-through to the 100% owner/shareowner.

As for (3), the self-charged interest income, it has to be included in the gross income of the S-corp on the Form 1120S. Is it correct?

[TAXNJ]

Not limited ...

Not limited to the following reference - further research needed for your scenario:

https://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2014/CorpTax/SelfChargedInterest.jsp

[RightOn]

Not limited to the following reference - further research needed for your scenario:

https://www.cpa2biz.com/Content/medi...edInterest.jsp

Thank you.

What I am asking now is not how the self-charged interest is taxed eventually though. At this time, I am trying to find out where it should be reported. Based on my readings, it is reported as 'other income' on Form K-1 box 10. So should it be reported as 'other income' on the Form 1120S too?

[TAXNJ]

Decision

Thank you.

What I am asking now is not how the self-charged interest is taxed eventually though. At this time, I am trying to find out where it should be reported. Based on my readings, it is reported as 'other income' on Form K-1 box 10. So should it be reported as 'other income' on the Form 1120S too?

If you know your "readings" support your position of interpretation that that is your decision.

[Roland Slugg]

I will try to provide a helpful reply to your main Q.

All interest income received by an S Corp flows directly to Schedules K and K-1, except for interest received by the corporation in the ordinary course of its business. The latter would include interest on its trade accounts and notes receivable and interest on loans made by the corp if it is in the business of lending money. Thus, the interest from all three sources you described should be reported directly on Schedules K/K-1, bypassing page 1 of F-1120S.

The answer to your other concern, regarding "self-charged interest" is more complex and requires you to determine if the S Corp is a passive activity for the shareholder or, alternately, if the shareholder borrowed the funds from the corp in order to invest them in a passive activity himself. If neither of these is true, the concept of "self-charged interest" is moot.

The IRS has stated that interest income taxable to the shareholder (or partner) of a passthrough entity is subject to the NIIT, but several commentators have disagreed, saying that such income should be offset by interest paid to the entity. For a 100% owned passthrough entity, the result of that would be a wash.