Interest expense, active S/H

[Gretel]

OK. I am starting this new thread following up on a similar issue.

If active, sole shareholder has to take out loan to issue more shares to increase capital, this interest expense is a deduction on pg. 2 of Sch.E, right.

Same scenario but shareholder wants to loan money to his corp. then what?

[erchess]

I can see

loaning money to a business that others at least partially own but how can you loan money to yourself? I can even see loaning money to the pension fund of a business you wholly own provided the plan covers employees

On the other hand, I cannot cite any authority for this opinion.

[Bees Knees]

TTB, page 4-14 says the following:

Interest expense—S corporations and partnerships. An individual
shareholder of an S corporation or partner of a partnership
reports interest expense in connection with debt-financed
acquisitions on either Schedule E or Schedule A of Form 1040, depending
on the type of expenditure to which the interest expense
is allocated. For example, if a shareholder borrows money to purchase
stock in an S corporation, the interest expense is properly
allocated to a trade or business expenditure of the S corporation.
The interest expense is reported in Part II of Schedule E on a separate
line and identified as “business interest,” followed by the
name of the S corporation. This interest expense is not subject
to the investment interest expense limitations on Form 4952. For
more details and other examples, see IRS Notice 88-37.

[Gretel]

This is what I read, plus a lot of other research.

I guess this confirms my first statement.

Does this also automatically mean for loans no interest expense deduction?

[OldJack]

>>Same scenario but shareholder wants to loan money to his corp. then what?<<

Same scenario--same answer.

[erchess]

What Gives?

How can someone loan money to an entity that he or she wholly owns? I can see how someone might loan money to a business in which he and one or more other persons own equity. What am I missing? What is the difference between my loaning money to my business and my contributing capital?

[OldJack]

How can someone loan money to an entity that he or she wholly owns? I can see how someone might loan money to a business in which he and one or more other persons own equity. What am I missing? What is the difference between my loaning money to my business and my contributing capital?

You yourself said it! They are different "entities". A shareholder does NOT own the entity, (s)he simply has a paper that says they have certain rights with the corporation. Mainly the right to vote.

[Davc]

A shareholder does NOT own the entity, (s)he simply has a paper that says they have certain rights with the corporation. Mainly the right to vote.

It's time to brush up on the meaning of the word "stock".

[OldJack]

It's time to brush up on the meaning of the word "stock".

Not sure what you mean Davc. If you mean the newer term "shares", I would refer you to many IRC sections that still refer to it as stock. ie: 26 USC Sec. 1. “Tax imposed.” (h)”Maximum capital gains rate” (11)(B)(iii)=” dividend on any share of stock – ...“

[Bees Knees]

You yourself said it! They are different "entities". A shareholder does NOT own the entity, (s)he simply has a paper that says they have certain rights with the corporation. Mainly the right to vote.

The shareholder owns stock that the corporation issued for the purpose of raising capital. In exchange, the corporation gives the shareholder the right to vote, the right to receive profits (dividends in the case of a C corporation, distributions in the case of an S corporation), and a share of things if and when the corporation is liquidated.

In a sense, that is the same thing as owning a piece of the entity.

To answer the question posted by erchess: "How can someone loan money to an entity that he or she wholly owns?" The answer is because the IRS and the courts allow it. Although they often try to reclassify some of the loans as capital, when the proportion of capital raised by issuing stock verses shareholder loans is way out of wack.

[Davc]

Owning stock in a corporation means you are one of the owners of the Corp. Rather than saying you don't own the Corp it should be stated as:

A sole proprietor is the business, a 100% shareholder owns the business. A less than 100% shareholder has partial ownership.