I don't know where to find it these days, but there was -
several years ago - an IRS ruling, or at least a
publication, that stated rather unequivocably that the
interest paid on debt to acquire S corp stock was business
interest, not investment interest. This conclusion may have
been limited to instances when the S corp was clearly in a
business, not just a conduit for investment. I think this
result would be very much to your liking.

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"James" <james_s1315[at]yahoo.com> wrote:

- quote -

Since the interest was paid to invest in a passthrough
entity it will generally be consider business interest not
investment interest. It is deductible on sch. E page 2.
just under the S corp. income in question. Use the caption
business interest and the fed Id of the S. corp. Often,
depending on your the software used, it may be necessary to
set-up a dummy K-1 just for this type of interest.

Charles DiSalvo, CPA

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- quote -

With the purchase being for stock, there is little
opportunity to generate investment income. Planning ahead of
time might have allowed him to pay a lot less for the stock
and instead loan money to the corporation. The interest
income from the loan would be investment income. If he's the
sole shareholder, it may be possible to adjust the capital
structure.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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Taxpayer borrowed $200,000 to purchase stock in an S corp.
The S corp issued a K-1 to him for $100,000, all nonpassive
income. Taxpayer has no investment income. Can taxpayer
deduct the interest on his loan as an offset against the S
Corp income on his 1040? If the interest is considered
investment interest expense, the deduction is lost for the
current year, right? How can he get a deduction?

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