Discussion:Trade or Business Interest Deduction
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Discussion Forum Index --> Tax Questions --> Trade or Business Interest Deduction
Contents |
Intro, developing fact pattern, C vs S, can skip
| 1 February 2007 | |
| Taxpayer incurred $19,000 of interest that is directly traceable to the purchase of an interest in a C corporation. Taxpayer materially participates in the business, thus the interest is not investment interest but rather "trade or business interest" and 100% deductible. The question is, where on the 1040? Schedule C? That will work, but certainly raises red flags to have such large losses every year. Any other ideas/suggestions? | |
| 1 February 2007 | |
| I think you are limited to investment interest or employee business expense | |
| 1 February 2007 | |
| No, I'm not. Trade or business interest is the proper classification. | |
| 1 February 2007 | |
| OK, what is the nature of his business?
Answer: he owns stock - an investment Anything else? Answer: Yes, he gets a W-2 from his corporation for conducting his trade. | |
| 1 February 2007 | |
| Actually, it looks like investment interest may be proper category for a C corp, since it produces portfolio income (dividends). Let's change the facts to make it an S corp. Deduct the interest on Schedule E? | |
| 1 February 2007 | |
| I can't remember why, but last year there was something that led me to deduct on Schedule C instead (for interest incurred to purchase an S corp) | |
| 1 February 2007 | |
| Thats what the 1040-X is for. When an honest mistake is made. | |
| February 1, 2007 | |
| If it's an S corp, you've got a whole 'nuther set of answers. Fill in your profile. You seem sure of yourself, but then not. Who are we talking to? | |
| 1 February 2007 | |
| I'm a tax attorney and partner in an accounting firm. No 1040X is needed for last year, as the tax is correct, whether on Schedule C or not. I believe it was a Lacerte issue last year that prevented placing this on Schedule E, but I see where it can be done this year. Lacerte does, however, incorrectly show the expense as "investment interest" | |
| 1 February 2007 | |
| I take that back. Just tried this year with Lacerte and still no luck. I guess I'll put it as negative miscellaneous income on page 1 of the 1040 unless anyone has any better ideas. | |
| 1 February 2007 | |
| S Corp. I actually have two clients with the same issue this year--one purchased a C corp and one an S. | |
| 1 February 2007 | |
| I agree that C corp is investment interest, as would S corp or partnership if it were a passive activity. However, my case is one where taxpayer materially participates, so it is trade or business interest. | |
| 1 February 2007 | |
| Anyone? This must come up evey time someone uses a seller note to finance an S corp stock acquisition. | |
| 1 February 2007 | |
| I hardly think buying one company's stock qualifies as a business to allow the deduction on Schedule C. | |
| 1 February 2007 | |
| mneath, click on profile and put it out there for the rest of the world to see. Then click on the "Edit this Page" tab from your profile. | |
Get your CITES here - for both C corp and S corp situations
| 1 February 2007 | |
| For C corps: Rev. Rul. 93-68, 1993-2 CB 72
| |
| 1 February 2007 | |
| For S Corps: Notice 89-35
Can't find it here on TA, so here is an offsite link to an article on it: http://www.nysscpa.org/cpajournal/2000/0400/Departments/d45500a.htm | |
| 1 February 2007 | |
| There seems to be some confusion. One does not have to be in the business of being a lender to treat interest as trade or business interest. According to Sec. 163, the investment interest limitation does not apply to any interest in an activity involving a trade or business in which the taxpayer materially participates. So, to avoid the investment interest limitations, I want to put the interest on page 1 of the 1040. | |
| February 1, 2007 | |
| I've only had this once as I recall, and got all I needed by dumping it into the investment interest area on the A, but there's no limit to be concerned with. I don't recall it being a Sch. E item, and C is definitely not the right answer. | |
| February 1, 2007 | |
| FYI Kevin: We only have Notices from mid-2003 to the present. We're still working on the older material.
- Tim Doyle, TaxAlmanac Moderator - Talk to me 15:44, 1 February 2007 (CST) | |
| 1 February 2007 | |
| Thanks Kevinh5. Notice 89-35 references Notice 88-37, which provides what I needed (Schedule E for those following along) | |
| 1 February 2007 | |
| You are welcome. I didn't know the answer, so I looked it up in the section on Investment Interest in Tax Facts, by the National Underwriter Company. I have found this reference to contain solid information that is not always in the normal tax references we buy. | |
| 1 February 2007 | |
| Interest on a loan to acquire an interest in an s corp is deducted on schedule E. 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 corp. | |
More info from Riley2
| 1 February 2007 | |
| Mneath, interest to carry an investment in a C corporation is investment interest. Interest to carry an investment in an S corporation is either investment, passive, or nonpassive interest (all except investment interet is deducted on Sch E), depending on the nature of the underlying assets in the corporation. | |
| 1 February 2007 | |
| JR1, don't I get credit for taking 10 minutes to look it up? I actually had to get up from my desk, walk all the way over to my bookshelf, pick up the book, flip to the index, go to the appropriate section, read the 3 pages of text, go back to my desk, type in the appropriate cases and rulings, try to find it on TA, go to the internet, search for an appropriate link, come back to TA, and post the answer. | |
Death&Taxes (talk|edits) said: | 1 February 2007 |
| Should I cue the violins for Kevin? :):) Actually this was an amazing discussion on an issue I'd never consider, probably because so many do not buy stock but assets, but I can see this if someone buys into an existing S Corp. | |
| February 1, 2007 | |
| We like actual answers rather than information that leads to the answers, esp. this time of year. Partial credit given for research. No credit for answer. | |
| 1 February 2007 | |
| getting the correct answer was merely a ministerial function once you had the research in front of you. :] | |
| 1 February 2007 | |
| actually, if your going to discount Kevin's work...Mneath provided the answer | |
| 1 February 2007 | |
| Kevin: It's a rough crowd today. We must be getting loopy.
I am actually impressed you took the time today. Additionally, you burnt extra calories by walking to and fro and standing (which burns more calories than sitting) while you read the three pages. Totally multi-tasking. | |
New fact pattern (2007)
| 2 February 2007 | |
| Thank you for the discussion here.
I have client that purchased a seller-financed very profitable "C" corp in 2005. I had new owner elect "S" corp 1/1/06 and he takes about $80,000 salary. The seller financed debt is in buyers name. I was under the assumption this would be all investment interest (and actually carried forward until paid off due to lack of investment income) however from what i read above this can be taken on page 2 of schedule E. Is that correct? I read the sitations but not sure if i read it correctly. . From the discussions above - you all get credit for the knowledge you share. Thank you. | |
| 2 February 2007 | |
| Rick, you are correct . the interest can be taken on Schedule E as discussed above. | |
| 2 February 2007 | |
| RickCPA1, take a look at Notice 89-35 (kudos again to kevinh5). The answer is actually a little more complicated than just "put it on Schedule E," as you have to treat the debt as if it was contributed to the S corporation and then trace its use by the assets of the corporation (cash & investments, passive assets, trade or business assets). My client is a professional services firm, so in my case the debt was 100% traceable to trade or business assets (the A/R and client list) and, therefore, deductible on page 2 of Schedule E. | |
Tlafranchi (talk|edits) said: | 13 August 2007 |
| I have not seen anything in your discussions or the cites to support a c corporation's acquisition debt to be allowable under 89-35 to be treated as business interest expense upon a subsequent conversion to an S corp. Seems that the answer would be investment interest expense since the acquisition was done when a C corp? | |
| 13 August 2007 | |
| please don't ask me to get up from my desk again. Once every 6 months is plenty. | |
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