|
Posted by LoTax on June 11, 2008, 12:54 pm
Please log in for more thread options
Harlan: Then, the very next paragraph in the NYSSCPA article explains
how to identify the "active interest expense" [a term that I think the
author of the NYSSCPA author made up...] based on what assets the pass-
through entity has, how they're used and whether or not the owner is a
material participant in the activity of the pass-through entity.
Here's that next paragraph: "For example, if the debt is allocated to
assets held for investment, such as stocks and bonds [held by the pass-
through entity], the interest expense will generally be classified as
investment interest expense. If the debt is allocated to equipment
used in the conduct of an active trade or business [of the pass-
through entity] in which the taxpayer materially participates, the
interest expense will be classified as active interest expense. If the
debt is allocated to assets used in an activity in which the taxpayer
does not materially participate, it will be classified as passive
interest expense."
It's clear to me that the interest expense in this instance would be
"business" interest expense ["active interest expense" in the words of
the author of the article.
The IRS Notice is clearer, even though it's less clear. You know how
those folks write....
--
<< ------------------------------------------------------- >>
<< 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, 2:50 pm
Please log in for more thread options
On Sun, 8 Jun 2008 17:25:05 EDT, Maren aka HiloBeads or PalmsEtc
>
>Replying to Harlan: I had assumed, as the statement was that she is
>buying
>the corporation, that she is buying the "incorporatedness" for lack of
>a better
>term (i.e. the legal entity). If the owner owns all the stocks in the
>corporation
>that implies (to me) that she is also buying all the stocks (we own a
>corporation
>like that, it's inactive, but we are keeping the legal entity).
right -- she's paying (through 120 monthly installments) for the legal
entity, the goodwill, the customer base, the retained earnings, the
contacts and brokerage connections, the rights to future commissions
(it is an insurance brokerage that was in business for about 40 years
before she purchased it), etc.
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 LoTax on June 8, 2008, 2:58 pm
Please log in for more thread options On Jun 5, 11:24�pm, eabren...@hotmail.com (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
>
> --
Elizabeth, the answer to your question is found in IRS Notice 89-35,
as explained in this excellent article:
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 Elizabeth Brennan on June 9, 2008, 2:51 pm
Please log in for more thread options
>> --
>Elizabeth, the answer to your question is found in IRS Notice 89-35,
>as explained in this excellent article:
>http://www.nysscpa.org/cpajournal/2000/0400/Departments/d45500a.htm
Thanks! That article was very helpful (assuming that I am reading it
rightly!). It seems to me that we are talking about "Active Interest
Expense" (since it is "incurred in connection with a trade or
business activity in which the tp materially participates and which is
not a rental real estate activity.") and the article says that "Active
interest expense is deductible on Schedule E along with losses from
pass-through entities of trades or businesses in which the taxpayer
materially participates."
Thanks again -- I printed this out and will file it with my copy of
the client return.
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 eagent on June 9, 2008, 3:31 pm
Please log in for more thread options On Jun 5, 11:24 pm, eabren...@hotmail.com (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
I just love these types of questions <g>!
First, was this a stock sale or an asset sale and who was really the
buyer? This information will be contained in the sales contract.
NOTE you (nor I nor anyone else) CANNOT rely on what we're told
because most clients do NOT really understand the legal formalities of
what they're doing. Most clients do NOT know how to differentiate
between themselves and their companies. To get the right answer
you'll need to review and scrutinize the sales contract.
Second, you say "SHE" is paying interest on this purchase, then you
say the interest is being reported on the K-1. This cannot be
correct. She is NOT the corporation, the corporation is issuing the
K-1 so either SHE is paying or the corporation is paying, but it
cannot be both.
If SHE is paying the interest it should be deductible as investment
interest expense - see Form 4952.
If the company is paying the interest (assuming legitimately so) then
the company gets the deduction on the face of the 1120S. NOTE - it is
highly unlikely that the sale was structured to allow the company this
deduction, though if done properly it can be done.
Thirdly, exactly who are the payments to? Specifically who is named
as the payee on the checks? If SHE bought the shares of stock from
HIM, SHE will write personal checks to HIM, SHE deducts the interest
on Form 4952 and HE claims it as income on Schedule B.
However, if she bought the assets of an existing corporation (WHICH IS
WHAT NORMALLY HAPPENS) then SHE should be making the payments to the
old corporation and NOT to the old owner individually.
With the caveat that without this information I'm just guessing,
here's my guess -
I'd bet this was supposed to be an asset sale and NOT a stock sale
since that is the norm. As an asset sale, either her or her new
company purchased the assets of the old business from the old
company. An asset sale allows the new company to restart
depreciation.
IF the deal was between her and the seller it is HER responsibility to
pay. So she gets to deduct the interest as investment interest
expense and her principal payments will increase her basis in the new
company.
However, if the deal was between her new company and the seller than
it is the company's responsibility to pay. Accordingly the company
would get to deduct the interest as an operating expense.
Lastly, remember - without actually reading the sales agreement there
is NO WAY to know what is supposed to happen, it is ALL conjecture and
assumption. This is one of those areas where clients get fidgety
because they NEVER want to pay to know what to do, they almost never
ask for help and guidance up front to get it structured properly
BEFORE it happens, yet they ALL want us to fix their mistakes after
the fact (and usually for free).
The best recommendation I can make is for your client to pony up the
sales agreement. Then either you read it, if you understand such
things, or you have it read by a professional tax preparer who is
experienced with such things. Then you can get the real scoop on how
it should be.
I do have a question - why is there a differnent account for the
business return? How come you aren't doing both?
Gene E. Utterback, EA, RFC, ABA
--
<< ------------------------------------------------------- >>
<< 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