My client owns several restaurants that each operate under a separate s corporation. He transfers money back and forth between the entities and there are substantial outstanding loans on these companies' books (to the other companies) at the end of the year. In fact, many of these loans have remained outstanding for several years. I've been calculating interest on these loans, as self-charged interest, and allocating a portion of the loan payments to interest as they are made. The ownership of each of these s corporations is the same, with my client and his wife being the owners. Am I handling this correctly?
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Please read this section of the law: https://www.law.cornell.edu/cfr/text/26/1.469-7
It gets a little tricky with self-charged interest and pass through entities owned by the same natural person.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
In the case of my client, the self-charged interest is non-passive. I should also add that I record the self-charged interest income and expense on the books, but on the s corp return I classify those items as non-taxable and non-deductible. So, I don't pass through any of the self-charged interest between corps to the owner's tax returns. I do this because it would all wash out on the owner's tax returns to zero anyway. The only thing it really changes is the owner's basis in each corporation (retained earnings too). Is this incorrect?Comment
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In answer to my own question, I found this article regarding self-charged interest. I believe I'm doing it correctly: https://www.thetaxadviser.com/issues...-interest.htmlComment
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