DEDUCTING INTEREST ON DEBT USED TO GET S CORP STOCK

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DEDUCTING INTEREST ON DEBT USED TO GET S CORP STOCK 1

A recent Chief Counsel Advice (CCA) discussed the rules for individuals deducting interest on debt incurred to purchase stock in an S corp. Since this is a question that we get asked on a regular basis, this is an excellent chance to review the suitable rules. The first rule would be that the interest tracing guidelines apply, which provide that interest expense on a debt is allocated just as as your debt to which the interest expense relates is allocated. This mouthful from the Regulations simply means that to trace the interest, the proceeds must be accompanied by you.

It is also important to keep in mind that these guidelines are separate from the rules that determine the position of the S corp shareholder under the “passive activity” guidelines. For example, assume that of the interest expenditure is treated as “business interest” — if the shareholder “materially participated” available, then your Schedule E reporting would apply, as described above.

However, if the shareholder’s status was considered “passive,” then your interest would be reported on Form 8582 and become governed by the unaggressive activity rules. The conversation above is a brief history of the complicated guidelines that apply in this field. Please contact us if you have any questions about how exactly the rules apply to your situation.

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