Multi entity loan structure

[Avs19]

Hi,

I'm working with a client that will be receiving a $800,000 SBA loan. He currently owns 50% of an Scorp and 50% interest in a partnership. The partnership owns the building that the Scorp is renting from. His plan is to use $200K to purchase the other 50% of the Scorp shares and $230K to purchase the other 50% interest in the partnership. $300K of the loan will be used to pay off the existing building loan and the remaining $70K will be used by the Scorp for cash flow. SBA can only deposit the loan into one account and can only accept payment from one account. We're trying to figure out the best way to structure this to line up the balance sheets and be able to deduct the interest. My thinking is to have SBA deposit the $800K into the partnership (which will soon be a single member LLC). From there, the LLC can loan the Scorp $70K for the cash flow and my client $430K for the purchase of the shares and partnership interest. The LLC would deduct 100% of the interest and report interest income from the Scorp and my client using the same interest rate that aligns with the SBA. The Scorp and my client would also get an interest deduction on their respective tax returns. Am I missing anything? Any better ideas?

Thanks

[sjrcpa]

Who is getting the loan - individual, LLC or S Corp?

Were the intended uses of funds disclosed on the loan application?

[Avs19]

According to my client, the LLC, Scorp, and individual will all be on the loan and can be deposited into the entity of choice.  I'll find out what the intended uses of the funds disclosed are for.

[Avs19]

The intended uses were disclosed. They match what I mentioned earlier

[qbteachmt]

To summarize, factually: an individual will have a SMLLC and an S Corp and this is self-rental. The SMLLC intends to be a lender to the sole proprietor, so the loan proceeds used to buy the partnership and the property all belong to the individual, and it's not part of the business operation. The sole proprietor intends to pay themselves interest, to allow both parties to claim it. And they're changing real estate interest to personal interest. The SMLLC is a lender to the S Corp. The fractions to the sole proprietor are the purchase of the rest of the S Corp, to buy out the partner, to shore up the S Corp, and to pay off the mortgage.

It seems this is all personal, including a loan from Shareholder? Are you maybe running the data in circles?

[Avs19]

That's correct. The only part that would be business is the $300K to refinance the SMLLC building and the $70K loan to the Scorp. The rest is personal to buy out the shares and partnership interest. Does it make sense to have the full amount of the loan issued to the individual? He can then loan the Scorp the $70K and deduct the rest of the interest on the 1040.

[qbteachmt]

The refi is on a personal investment (real estate), not a business activity. That goes with the personal return. The loan to the S Corp is a personal loan "from shareholder." The S Corp does not pay the SBA directly, if it's not the S Corp as the borrower. If the S Corp pays the SBA, that's really a distribution to the shareholder. If there is a wrap around lending agreement, the S Corp pays the person, the person pays the SBA.

"Does it make sense to have the full amount of the loan issued to the individual?"

Here's what you stated: "the LLC, Scorp, and individual will all be on the loan and can be deposited into the entity of choice"

All on the loan is not the same as three separate loans. The LLC is moot, it's the person now. The S Corp is the only other entity, so if the individual is signing as President, that is person + Corp. If they are signing alone, they are the borrower and the debt is all theirs no matter what.

I read a lot of semantics here, but it's a shorter line between the points. It seems to be one person, multiple activities, not multiple start and end points.

[Avs19]

First of all, thank you both for your time and input. I truly appreciate it!

In the end, the goal is to be able to deduct as much interest from the loan as possible. The $800K can only be deposited into one account. If it's deposited into the individuals account, he should be able to deduct the interest from the Scrop share purchase on schedule E. The 50% interest in the partnership is primarily the partner's equity in the building. I'm assuming he can deduct the interest from that as well as the $300K refi on schedule E. The $70K to the Scorp would be a loan from the shareholder with the Scorp deducting interest according to the note and the shareholder claiming as interest income on the 1040. I believe the only way to deduct the interest on the $70K would be as investment interest on the schedule A.