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Subject Author Date
interest on installment purchase of s-corp Elizabeth Brennan 06-05-2008
Posted by Elizabeth Brennan on June 5, 2008, 11:24 pm
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 I have a client who is purchasing an s-corp via a 10-year structured
installment agreement. She is using owner-distributions from the
business to pay the installments. These distributions are about 1/2
the amount of w-2 salary she pays herself for the work she does in the
business. The business is profitable enough to support this
arrangement.

She is paying approximately $16,000 interest per year on this
purchase. She materially participates in the business. I've begun
looking into the deductibility of this interest, and perhaps I'm
looking under the wrong title, but I seem to be running into a
"non-deductable" answer. I'm hoping that some of you tax pros could
point me in the right direction -- is this interest deductible, what
is it called and where is it deducted? Since she is being taxed on
100% of the distribution, and the individual from whom she is
purchasing the business is claiming the interest paid each year, my
client would surely like to deduct the interest payments to offset
some of her s-corp profits (the interest is approximately 1/2 of the
profits).

BTW, the CPA who prepares the 1120S includes the interest payments on
an information line on the second page of the K-1, if that makes any
difference.

Thanks in advance!
Elizabeth

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Posted by Seth on June 6, 2008, 10:55 am
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>I have a client who is purchasing an s-corp via a 10-year structured
>installment agreement.

>She is paying approximately $16,000 interest per year on this
>purchase.

She bought a business and is paying interest on the purchase price.
That should be deductible, though I'm not sure where (it isn't passive
investment interest).

Seth

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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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Posted by Elizabeth Brennan on June 9, 2008, 2:45 pm
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On Fri, 6 Jun 2008 10:55:05 EDT, sethb@panix.com (Seth) wrote:

>>I have a client who is purchasing an s-corp via a 10-year structured
>>installment agreement.
>
>>She is paying approximately $16,000 interest per year on this
>>purchase.
>
>She bought a business and is paying interest on the purchase price.
>That should be deductible, though I'm not sure where (it isn't passive
>investment interest).
>
>Seth

Thanks Seth. After I posted the question, the client contacted the CPA
who generates the 1120S (and therefore the K-1). He said to "net" it
with the business profits reported on line 1 of the K-1. I wasn't too
thrilled with that answer, since the IRS had a K-1 showing $16,000
more on line 1 than we were going to report on Line 28(j) of the her
personal Schedule E. But after some discussion back and forth, the CPA
suggested entering it on line 12R of the K-1 input screen with the
statement "interest expense for stock buy-out" as an explanation for
the deduction. The CPA also warned me that this interest was not
deductible for PA.

Elizabeth

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Haskel LaPort on June 6, 2008, 11:34 am
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>I have a client who is purchasing an s-corp via a 10-year structured
> installment agreement. She is using owner-distributions from the
> business to pay the installments. These distributions are about 1/2
> the amount of w-2 salary she pays herself for the work she does in the
> business. The business is profitable enough to support this
> arrangement.
>
> She is paying approximately $16,000 interest per year on this
> purchase. She materially participates in the business. I've begun
> looking into the deductibility of this interest, and perhaps I'm
> looking under the wrong title, but I seem to be running into a
> "non-deductable" answer. I'm hoping that some of you tax pros could
> point me in the right direction -- is this interest deductible, what
> is it called and where is it deducted? Since she is being taxed on
> 100% of the distribution, and the individual from whom she is
> purchasing the business is claiming the interest paid each year, my
> client would surely like to deduct the interest payments to offset
> some of her s-corp profits (the interest is approximately 1/2 of the
> profits).
>
> BTW, the CPA who prepares the 1120S includes the interest payments on
> an information line on the second page of the K-1, if that makes any
> difference.

How exactly is the interest being reported on the K-1, "information line on
page 2" is rather vague?

BTW, client is not taxed on the distributions.


>
> Thanks in advance!
> Elizabeth

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Elizabeth Brennan on June 9, 2008, 2:46 pm
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wrote:


>>
>> BTW, the CPA who prepares the 1120S includes the interest payments on
>> an information line on the second page of the K-1, if that makes any
>> difference.
>
>How exactly is the interest being reported on the K-1, "information line on
>page 2" is rather vague?

K1: On Line 17 "Other Information" they list a code T* with the
notation STMT. on the second page is the footnote: "Interest expense
paid to <name of previous owner of 100% of the corporate stock> for
2007 was (Stock Buyout)" and the precise amount of the interest.
>
>BTW, client is not taxed on the distributions.
Right -- she's being taxed on the profit, and the distributions are
coming from the profit.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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