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How do I input imputed interest on an 1120S

Level 1

I entered it as an M-1 timing difference, but it is throwing retained earnings off.

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4 Comments 4
Level 15

I think you need more details. Imputed interest for a Cash Basis entity? Owed TO the S Corp? Owed BY the S Corp? Owed to/from a shareholder, a lending institution? The proceeds of the borrowing were used for what? Secured by?

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Level 1

It is imputed interest expense on a loan from a shareholder.  I entered it as an M-1 timing difference because I didn't find a way to input it as a permanent difference.  After asking the question, I saw I neglected to also increase interest expense by the same amount.  Increasing interest expense fixed the retained earnings issue, except that I had to override to make it a AAA item instead of a timing difference on the Schedule M-2/Retained Earnings Worksheet.

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Level 3

The M-1 Worksheets on the 1120S and 1065 does not have a line for "imputed interest" as a permanent timing difference. This item affects the tax return only. Like you, I have been adding it as an interest expense on the tax return and writing it in on the M-1 Worksheet ... putting it in as a "timing difference" affecting the tax return only. (But it is a permanent difference) Remarkably, it shows up correctly on Line 7 of the M-1 Schedule. Consequently, since the deduction comes out of thin air, the deduction lowers the taxpayer taxable income, so in effect, taxpayer has income that has never been taxed (non-taxable income). In theory, tax exempt interest and presumably imputed interest increases basis so that when the stock or ptsh interest is sold, those non-taxable income items are not taxed. However, imputed interest does not show up on the Owner's Basis Statement but tax exempt interest does. Weird! Consequently, it seems the Basis Statement is incorrect. With the new basis statement requirements beginning this year, it appears this might be a problem. Note, that Line 5 of the Owner's Basis Statement is for tax exempt interest ... maybe imputed interest should go there.??? Maybe a new line on the basis statement is needed for imputed interest.??? Maybe a new line on the M-1 Worksheet is in order. ??? On the 1065, the imputed interest does not show up as an upward adjustment of the Capital Account which it should. On the 1120S there would be an effect on the AAA account, too. Comments?

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Level 4

My understanding is that a cash-basis corporation only shows the interest as an expense when it actually pays out the interest.

Could it be that you should be recording the imputed interest as other K-1 taxable income to the shareholder and then back it off as an adjustment to M-1? Corporation has 30 days from end of tax year to actually pay out the interest if they wish to record it as a deduction on the corporation.

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