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What does "sells his business" mean? Right now, your explanation is that Corp A still exists, and there was a sale of "stuff" that helps you be in the "business." Not selling the corporation, or selling all assets of that Corp A business. Example: I would run a tire shop and a coffee shop, and you just bought the coffee shop business? And we have an installment sale.
Sorry, let me expand here... The business was a asphalt company and was sold for a lump sum to company B. Company B is unable to operate the business and pay its obligations and it goes out of business and sells the business to Empire Asphalt. Empire asphalt takes on the debt owed to Company A from the initial sale. The remaining balance is 3 million with 8% interest and Empire is treating it as a debt on their books. The original owner agrees to this loan with empire asphalt for the remaining balance owed. The loan is prsnly guaranteed.
Company A (which is now a new corp with a new name) is acting as a shell company that is receiving the interest income from Empire asphalt. Comp A does not have any operations and just receives this interest on this loan. K-1 is issued to shareholder of comp A (new name new corp) and is reporting this income on their 1040.
I am trying to determine if this interest is considered passive income? or active income as it is flowing through the K-1 on the shareholder's prsnl tax return.
This is significant because the shareholder of corp A has another s-corp (lets call it Corp D) that has massive passive losses from prior years.
Sounds like portfolio to me; neither passive nor active.
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