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....

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LoTax wrote:
- quote -

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

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- quote -

e.<<<

Harlan, have you read the NYSSCPA article? It pretty much totally
establishes that Schedule E *is* the right place for the interest
deduction.

- quote -

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"Elizabeth Brennan" <eabrennan[at]hotmail.com> wrote in message
news:48588b37.16984265[at]newsgroups.comcast.net...
- quote -

Your arrangement with the client is not that unusual. I to have similar
arrangements with a few of my clients. I do however prefer the label myself
"consultant" or "part time controller" rather than bookkeeping department.

Since you are privy to the S-Corporation's original books of entry, can I
assume the buy-out installment payments are made by the corporation and
posted to the Sharholder's Distributions account?











- quote -

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On Mon, 9 Jun 2008 15:31:30 EDT, eagent <gene[at]alliancetax.com> wrote:


- quote -

yeah...some of them get to be real doozies! <g

- quote -

several reasons...

1. I don't wanna <g> . I'm getting up there in age and I realize I'm
not as sharp as I once was. I do all the bookkeeping on this business
and I really don't want to do the tax returns.

2. The owner wants continuity. This CPA firm has been doing the tax
returns for a very long time (quite possibly for the entire life of
the company) and are the ones that structured the buyout.

3. I've been an EA (my license is currently in inactive status while I
decide if I even want to keep it -- like I said, I'm not as sharp as I
used to be and I'm leaning toward retirement) and a QuickBooks
ProAdvisor, and I work very well with other professionals. The CPA
knows that I'm not trying to push him out, the client does not feel at
all pressured to choose between me and the CPA, and I don't put my
name on the Corp returns -- a win-win-win situation! <g
3. The owner doesn't want to pay the CPA's rates to do her own
personal return. She has 2 K-1s for two different S-corps (she's the
sole owner of the one in question and a partial owner of the other),
one W-2 and two children. She figures it's not a tough return and was
going to do it herself on Turbo Tax, till it came to trying to figure
out what to do with that $16,000 of interest she had paid the former
owner for the stock buyout. I was helping her look into it as a
courtesy (she pays me a LOT of money to be her bookkeeping department
<smile> !)

E

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eagent wrote:

(snipped....)
- quote -

Gene, I got the impression it was a sale of stock between old and new owner.
(snipped....)
- quote -

Yes, we would all be interested as to what actually happened. Please
let us know, Elizabeth.

- quote -

This is a great question, Gene. If new owner owns 100% of the stock
(seems so, since she is "purchasing an s-corp via a 10-year structured
installment agreement."), then she should be the one to hire and fire,
and/or choose the corporate accountant.

What are we missing now? (grin)

ChEAr$,
Harlan Lunsford, EA n LA

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<< ------------------------------------------------------- > << 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. > << ------------------------------------------------------- >

Elizabeth Brennan wrote:
- quote -

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

--
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On Jun 5, 11:24*pm, eabren...[at]hotmail.com (Elizabeth Brennan) wrote:
- quote -

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

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On Sun, 8 Jun 2008 14:58:37 EDT, LoTax <lotax[at]hotmail.com> wrote:


- quote -


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

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<< ------------------------------------------------------- > << 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. > << ------------------------------------------------------- >

On Sun, 8 Jun 2008 17:25:05 EDT, Maren aka HiloBeads or PalmsEtc
<hilobeads[at]gmail.com> wrote:

- quote -

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

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On Fri, 6 Jun 2008 22:31:06 EDT, Harlan Lunsford
<hnslunsford[at]bellsouth.net> wrote:


- quote -

She entered into an installment sale to buy 100% of the stock from the
previous owner.

- quote -

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. > << ------------------------------------------------------- >

On Fri, 6 Jun 2008 11:34:29 EDT, "Haskel LaPort" <QBFanBoy[at]gmail.comwrote:


- quote -

K1: On Line 17 "Other Information" they list a code T* with the
notation STMT. on the second page is the footnote: "Interest expense
paid to <name of previous owner of 100% of the corporate stock> for
2007 was (Stock Buyout)" and the precise amount of the interest.
- quote -

coming from the profit.

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On Fri, 6 Jun 2008 10:55:05 EDT, sethb[at]panix.com (Seth) wrote:

- quote -

Thanks Seth. After I posted the question, the client contacted the CPA
who generates the 1120S (and therefore the K-1). He said to "net" it
with the business profits reported on line 1 of the K-1. I wasn't too
thrilled with that answer, since the IRS had a K-1 showing $16,000
more on line 1 than we were going to report on Line 28(j) of the her
personal Schedule E. But after some discussion back and forth, the CPA
suggested entering it on line 12R of the K-1 input screen with the
statement "interest expense for stock buy-out" as an explanation for
the deduction. The CPA also warned me that this interest was not
deductible for PA.

Elizabeth

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<< ------------------------------------------------------- > << 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. > << ------------------------------------------------------- >

On Jun 6, 4:31 pm, Harlan Lunsford <hnslunsf...[at]bellsouth.net> wrote:
- quote -

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).

In either case, the seller should be the one earning the interest.
If the seller declares the interest as income, the buyer should be
able
to deduct the interest as an expense (assuming this isn't personal
interest).

??

Aloha,
Maren
HiloBeads: Beads - Beading Supplies - Hand-made Jewelry
http://www.hilobeads.com/
Blog at: http://hilobeads.blogspot.com/
- Weleweka (mgambo) and job's tears beads available -

========================================= MODERATOR'S COMMENT:
Please trim the number of lines in your signature in future messages

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On Jun 5, 11:24�pm, eabren...[at]hotmail.com (Elizabeth Brennan) wrote:
- quote -

as explained in this excellent article:
http://www.nysscpa.org/cpajournal/20...ts/d45500a.htm

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Elizabeth Brennan wrote:
- quote -


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

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"Elizabeth Brennan" <eabrennan[at]hotmail.com> wrote in message
news:4848a50b.655585031[at]newsgroups.comcast.net...
- quote -

How exactly is the interest being reported on the K-1, "information line on
page 2" is rather vague?

BTW, client is not taxed on the distributions.


- quote -

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In article <4848a50b.655585031[at]newsgroups.comcast.net> ,
Elizabeth Brennan <eabrennan[at]hotmail.com> wrote:
- quote -

She bought a business and is paying interest on the purchase price.
That should be deductible, though I'm not sure where (it isn't passive
investment interest).

Seth

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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

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