A cash basis taxpayer reports interest income in the year in which the taxpayer actually or constructively receives it. When his S Corporation accrues interest income for shareholder loan receivable, the interest income flows to the shareholder through Schedule K-1. Do the cash basis S/H have to report it as income on 1040? If yes, then when he pays the interest later, how can he deduct interest payment against previously reported interest income?
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Maybe I don't follow
>>how can he deduct interest payment against previously reported interest income<<
Maybe I don't follow this. Why would his interest payment be deductible? What did he borrow the money for? Loan tracing rules will determine how (or if) he can deduct the interest. That does not affect the pass-through income on his K-1.
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