|
Posted by Harlan Lunsford on June 6, 2008, 10:31 pm
Please log in for more thread options
Elizabeth Brennan wrote:
> 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 $16,000 interest per year on this
> purchase. She materially participates in the business. I've begun
> looking into the deductibility of this interest, and perhaps I'm
> looking under the wrong title, but I seem to be running into a
> "non-deductable" answer. I'm hoping that some of you tax pros could
> point me in the right direction -- is this interest deductible, what
> is it called and where is it deducted? Since she is being taxed on
> 100% of the distribution, and the individual from whom she is
> purchasing the business is claiming the interest paid each year, my
> client would surely like to deduct the interest payments to offset
> some of her s-corp profits (the interest is approximately 1/2 of the
> profits).
>
> BTW, the CPA who prepares the 1120S includes the interest payments on
> an information line on the second page of the K-1, if that makes any
> difference.
>
> Thanks in advance!
> Elizabeth
>
Ah, this is a GOOD one.
When one "buys" a corporation, S or C type, he is buying stock in the
corporation. So I think the main question here, is from whom is she
buying the stock?
Is it:
(1) from the other owner of the corporation? or
(2) is she buying newly issued shares of the corporation, issued as it
is paid for?
And depending on whether 1 or 2 above, who is earning interest?
ChEAr$,
Harlan Lunsford, EA n LA
--
<< ------------------------------------------------------- >>
<< 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, 2:49 pm
Please log in for more thread options
On Fri, 6 Jun 2008 22:31:06 EDT, Harlan Lunsford
>Ah, this is a GOOD one.
>
>When one "buys" a corporation, S or C type, he is buying stock in the
>corporation. So I think the main question here, is from whom is she
>buying the stock?
>
>Is it:
>(1) from the other owner of the corporation? or
>(2) is she buying newly issued shares of the corporation, issued as it
>is paid for?
She entered into an installment sale to buy 100% of the stock from the
previous owner.
>And depending on whether 1 or 2 above, who is earning interest?
The previous owner, who is reporting it on her tax return (which is
prepared by the same CPA who continues to prepare the 1120S and who
structured the stock buyout.)
My client is considered the sole owner of this S-corp, but she is
paying the installments for 10 years.
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 Harlan Lunsford on June 9, 2008, 3:59 pm
Please log in for more thread options Elizabeth Brennan wrote:
> On Fri, 6 Jun 2008 22:31:06 EDT, Harlan Lunsford
>
>
>> Ah, this is a GOOD one.
>>
>> When one "buys" a corporation, S or C type, he is buying stock in the
>> corporation. So I think the main question here, is from whom is she
>> buying the stock?
>>
>> Is it:
>> (1) from the other owner of the corporation? or
>> (2) is she buying newly issued shares of the corporation, issued as it
>> is paid for?
>
> She entered into an installment sale to buy 100% of the stock from the
> previous owner.
>
>> And depending on whether 1 or 2 above, who is earning interest?
> The previous owner, who is reporting it on her tax return (which is
> prepared by the same CPA who continues to prepare the 1120S and who
> structured the stock buyout.)
>
> My client is considered the sole owner of this S-corp, but she is
> paying the installments for 10 years.
>
> Elizabeth
>
Ahah! Now we know. You say now, that "She entered into an installment
sale to buy 100% of the stock from the previous owner." This means
that the transaction has nothing to do with the corporation but is a
private sale between previous stockholder/owner and new one. Therefore
she is paying interest to the previous owner, and not to the corporation.
Therefore the interest has nothing whatsover to do with the corporation
and not appropriate atall to show it on any schedule k-1.
If your practice were a corporation, and I offered to buy all your
stock, I would pay you and not the corporation. The latter of course
would have to transfer the shares on the books from you to me, just like
any stock transaction.
Therefore, it is not right to "net" the interest with the ordinary
income (line 1) on the k-1. In fact it's not a deduction on schedule e.
Try schedule a, under investment interest.
ChEAr$,
Harlan Lunsford, EA n LA
--
<< ------------------------------------------------------- >>
<< 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 LoTax on June 10, 2008, 1:11 pm
Please log in for more thread options >>>Therefore, it is not right to "net" the interest with the ordinary
income (line 1) on the k-1. In fact it's not a deduction on schedule
e.<<<
Harlan, have you read the NYSSCPA article? It pretty much totally
establishes that Schedule E *is* the right place for the interest
deduction.
>http://www.nysscpa.org/cpajournal/2000/0400/Departments/d45500a.htm
--
<< ------------------------------------------------------- >>
<< 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 Harlan Lunsford on June 10, 2008, 3:09 pm
Please log in for more thread options LoTax wrote:
>>>> Therefore, it is not right to "net" the interest with the ordinary
> income (line 1) on the k-1. In fact it's not a deduction on schedule
> e.<<<
>
> Harlan, have you read the NYSSCPA article? It pretty much totally
> establishes that Schedule E *is* the right place for the interest
> deduction.
>
>> http://www.nysscpa.org/cpajournal/2000/0400/Departments/d45500a.htm
>
I have read it indeed, and it all hinges around definition of active
interest expense. Here is how it is defined: "Active interest expense
is interest incurred in connection with a trade or business activity in
which the taxpayer materially participates ......"
Paying interest to buy stock is not in connection with a trade or
business ACTIVITY, but rather in connection with purchase of stock."
ChEAr$,
Harlan Lunsford, EA n LA
--
<< ------------------------------------------------------- >>
<< 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. >>
<< ------------------------------------------------------- >>
|
| Similar Threads | Posted | | Can I purchase an equity interest in family real estate w/o tax consequences | February 27, 2008, 4:37 pm |
| New installment agreement after default? | June 20, 2006, 2:12 am |
| Can mortgage interest paid to a foreign lender be considered portfolio interest (tax exempt)> | March 10, 2007, 1:06 am |
| Can taxpayer revoke installment agreement? | May 22, 2008, 11:28 am |
| File for extension or request installment agreement, which is better? | April 10, 2008, 6:03 pm |
| IRS Announces Installment Agreement User Fee Increases for Some Taxpayer | December 29, 2006, 8:52 pm |
| Form 6251- Line 4 of Home Mortgage Interest Adjustment Worksheet, accounting method needed to determine a HELOC interest usages. | October 16, 2008, 10:51 am |
| Married couple earning ~$31,100/year with just over $25,000 in IRS liabilities - installment agreement or OIC? | September 12, 2008, 10:45 am |
| Help- corporate purchase | July 19, 2007, 10:32 pm |
| What is the import tax on ebay purchase? | December 8, 2006, 2:45 am |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap