Is the S-Corp business interest to finance the Purchase of S-Corp Stock used to decrease the stock basis?

[Running26]

I know that on Sch Page 2 you can add a line to include the business interest in additional to the K-1 ordinary business income line.  Does the interest get used to decrease the basis in the S-Copr stock?

In other words, do I manually go into stock basis and record a decrease to basis?

[Running26]

My main question is does this business interest used to finance the purchase of S-Corp stock required to be used as a decrease in stock basis or is it not part of the stock basis calculation?

[sjrcpa]

It is not part of the basis 

[Running26]

Thank you for the response

If it is not a reduction of basis, I can't get Lacerte to not deduct it from basis (I get a critical diagnostic)

[qbteachmt]

I think we need more info.

From whom? To whom? Why?

For instance, did one S Corp buy another? Or, is one S Corp shareholder leaving, and where are those shares being sold to (another individual, back into the corporation)? Or, did one shareholder need to get financing to buy into the S Corp (typical for a private practice)?

[Running26]

Yes, your last point.  Taxpayers added a Heloc to their home mortgage to buy a business.  I have been deducting the business interest portion on Sch E page 2 and taking it as a decrease in basis, but I am not 100% sure that is right.  Lacerte seems to not let me override and not deduct from basis.

[TaxGirl3 · Accepted solution]

It does not reduce basis, or rather it both increases and decreases basis - a wash.  In order to pay the deductible interest (which reduces basis), the taxpayer paid it personally (a contribution which increases basis).

Assuming it financed an operating nonpassive business, add it to the related K-1 input screen as a nonpassive loss in the 'Separately Stated Income and Deductions' section and also add that amount in the 'Basis Limitation' section as an other item that increases stock basis.