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30 September 2008

Re: [taxchat] interest on a loan to S Corp by the shareholders

There's nothing wrong with the way you're doing it, Lynne, because your shareholder is reporting it as income.  The problem comes when an accrual basis corporation deducts interest that is owed to a cash basis related party (shareholder), when it is not included in the shareholder's income.
 
 
Sent: Tuesday, September 30, 2008 7:57 AM
Subject: Re: [taxchat] interest on a loan to S Corp by the shareholders

then ive been doing it wrong for years, as i've always taken the interest as a deduction on the corp return, but have always issued a 1099-INT to the shareholder, so they pick it up as income.  each year the note is renewed for 1 year & recorded in the corp minute book.  i dont see where IRS would rule against this.
lynne


Cris Kelly wrote:

I put this question up awhile ago, and Debbie B being the wonderful person that she is responded with the below.

"interest on loan to S Corp

An S-Corp cannot deduct accrued interest owed to a cash basis shareholder.  You can record the interest on the S-Corp books, but make an M-1 adjustment on the S-Corp tax return since it cannot be deducted until paid.

Debbie B"

The preparer doing their individual return wants to know why I am not deducting the amount on their return.  She does not think the ABOVE statement is correct.  I would also like to point out that she is the person that did the corp return the prior year and didn't include any interest calculation!

I am going to start trying to find this written somewhere; however, I thought if anyone knew they could give me some directions to narrow done by research.

Thanks for the help,

Cris

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