Colin Cody, CPA
----- Original Message -----From: Cris KellySent: Tuesday, September 30, 2008 11:59 AMSubject: RE: [taxchat] interest on a loan to S Corp by the shareholders
This is what I found in my Kleinrock master tax guide
See Code Sec. 267(a)(2) -- When different methods of accounting are used by related taxpayers, accrued interest and expenses owed to the related taxpayer may not be deducted until the time that the interest or expense is includible in the gross income of the cash basis payee. Thus, an accrual-basis payor is placed on the cash basis for the purpose of deducting business expenses and interest owed to a related cash basis taxpayer.
The related taxpayers included in this rule are described in Code Sec. 267(b) and Code Sec. 267(e).
Cris
From: taxchat@yahoogroups
.com [mailto:taxchat@ yahoogroups. com] On Behalf Of Colin Cody
Sent: Monday, September 29, 2008 11:45 PM
To: taxchat@yahoogroups.com
Subject: Re: [taxchat] interest on a loan to S Corp by the shareholders
Stopping with the general purpose IRS Publications can give incomplete answers. Per regs §1.267(a)-1(b)
(1)(iii) income is constructively received when it is available so that the related party had the ability to have drawn it - which then overrides the rule in Pub 542 below .
I believe the problem is when the entity is on the cash basis... since there is no related "constructive disbursement" rule that I know of ;-)
Colin Cody, CPA
----- Original Message -----
From: Debbie Breedlove
Sent: Monday, September 29, 2008 8:06 PM
Subject: Re: [taxchat] interest on a loan to S Corp by the shareholders
Awwww, shucks, Cris. Since you called me a wonderful person, I just had to look this up for you. I didn't have much time to spend on it because I'm kinda swamped right now, and I didn't have a cite because this was just one of those things I've always known, and I don't remember where I heard it. I can give you this info that I found in Pub 542 (Corporations)
. As you can see, this is a general rule that applies to most entities, not just corporations. See Pub 542 for more info....
I hope this helps.
A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income......
Debbie B.
From: Cris Kelly
Sent: Monday, September 29, 2008 3:27 PM
Subject: [taxchat] interest on a loan to S Corp by the shareholders
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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