Interest deduction

[TAXMAN]

TP borrows 1.18m. Takes 280k and buys out remaing shareholders in an S corp. He is now sole shareholder. Takes 600K buys a building to put a similar business in. Takes 300k to renovate bldg and buy equipment to open with. Remainder used as operating expenses. Building and land colateral for loan. Operating similar business as a schedule C. 2 questions: what can I do with interest on the 280k and can I componet depr the improvements/repairs to building? Many thanks.

[Guest Taxed]

The way I am looking at this based on what you stated. The sole shareholder and sub S is still in the business. 100% owner of the Sub S should be able to deduct the interest on the 280K.

Sch C business is a new business so depreciate the building and improvements. Sec. 179 for equipment?

Interest deduction on the working capital portion on Sch C.

[jklcpa]

You need to follow the interest tracing rules for this. Set up a spreadsheet to trace how the proceeds were used, to allocate the interest allocable to each, and to properly account for the repayments. The tracing rules also have a specific order in which the principal repayment of the debt is applied. The $280K is in the investment interest category.

If you are unsure, check out Pub 535 under the section "Allocation of Interest" and also at the bottom of that section for "Loan Repayment" for the ordering of principal application.

[jainen]

>>can I component depr the improvements/repairs to the building?<<

Theoretically maybe, but it isn't easy and it isn't cheap. Cost segregation requires an engineering study.

[TAXMAN]

OK on most. I am still concerned whether I need to label the 280k as investment interest. Although he is the remaining stockholder of the s corp.The S corp had health profit last year per return. TP does take a reasonable salary based on the income and is very active in the business. Could thid be looked at like partnership interest is? Just think to myself.

[jainen]

>>Could thid be looked at like partnership interest is?<<

I'm not sure what you are referring to, but anyway the loan proceeds were used to acquire stock in a corporation, which is an investment. All that matters is what the money was for, not the relationship of the parties. Even if he had borrowed the money on behalf of the corporation, it was not used for operating the business so you are still just looking at investment interest expense.