Discussion:Interest Paid on Purchase of S-Corp Stock

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Discussion Forum Index --> Tax Questions --> Interest Paid on Purchase of S-Corp Stock

RNelly (talk|edits) said:

6 February 2007

When a sharehoder buys the stock from the other shareholder this is a above the line deduction on Sch E page 2. But does the interest paid to be deductable have to be on a contract directly with the seller on a contract or can the buying stockholder get a home equity loan to pay off the seller and then write off the home equity interest above the line? Above the line is best but it sounds to good to be true!

Riley2 (talk|edits) said:

6 February 2007
The answer is yes, the loan can be from a bank, and the interest will still be deductible on Sch E, as long as the underlying assets of the corporation are trade or business assets.

Kendrick (talk|edits) said:

16 November 2010
Really. Can you direct me as to where I can read this? Why wouldn't the interest be considered investment interest, he is buying stock?

This could be the solution to a similar situation I am trying to figure out. It makes sense, as Riley2 points out, if the corporation essentially has trade or business assets, not investment assets.

But I would take it to mean this would not work with a C Corporation, since there is no passthrough to a Schedule E?

R2 (talk|edits) said:

16 November 2010
If the client is buying C corporation stock, the interest is investment interest.

If the client is buying S corporation stock, the interest is deducted on Schedule A or E, depending on the nature of the underlying assets. See Notice 89-35.

Kendrick (talk|edits) said:

20 November 2010
Thanks R2.

ATL Tax (talk|edits) said:

9 March 2013

My client originally purchased C-Corp stock and we were able to take the investment interest against the dividend income of the corporation. Now he is an S-corp, but I have investment interest expense carryover on his personal return. I told the client we can't take the investment interest on Sch E against the S-corp earnings, but I wanted to make sure I'm not costing him a big deduction, and later find out I need to notify my insurance carrier of a claim. Thanks.

And here is one you can use in your practice: When talking to clients about my office going paperless, I tell them I went totally paperless for a while, but it didn't work out too good in the bathroom.

JR1 (talk|edits) said:

March 9, 2013
You can take that interest on Sch. A as I recall...

Ckenefick (talk|edits) said:

9 March 2013
JR is right.

Change in use of the proceeds is deemed to occur on the conversion date. PLR 9040066. As such, pre-conversion int exp is Inv Int Exp and retains its character as such (i.e. with respect to the c/f). Post-conversion interest expense, on the other hand, is an above-the-line deduction.

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