Personal interest used for Scorp

[Avs19]

A client of mine flips houses. She ran into some problems last year and had to max out some personal credit cards to keep the business going incurring around 10K in interest. What's the best way to show this on the balance sheet? Is it possible to write off the interest?

[itonewbie]

Possibly.  See §1.163-8T for interest tracing rules.

Edit: Didn't notice this is for an S corp.  Scratch what I said.  There's more than the tracing rules then.

[Terry53029]

I believe for an S-Corp your client can deduct the interest on schedule E UBE. Correction For the S-corp the deduction would go on the 1120S. Even if you use a personal CC for your S-corp it is deductible, but you must separate the personal from business. best to have a CC just for business, but all interest used for your business is deductible

[Avs19]

I thought that was only for partners in a partnership. I don't think s corp shareholders can use that form.

[Avs19]

Any thoughts?

[qbteachmt]

Were the amounts "borrowed" handled as loans from shareholder or not?

[Avs19]

I don't believe there's a formal note at the moment but one can be drawn up.

[qbteachmt]

"but one can be drawn up."

Well, here's what I do: Did the S Corp pay the credit card directly, or pay the shareholder who then pays the personal liability?

Because even the IRS can find what is discoverable.

[Avs19]

There was not enough money in the S Corp to pay the shareholder. The general contractor ran away with over 30K and the contractors that were working on the property came after her. It was a mess. She lost over 200K in the end. She was maxing out business and personal credit cards just to be able to sell the flipped property.

[qbteachmt]

"There was not enough money in the S Corp to pay the shareholder."

That's a payroll issue.

"The general contractor ran away with over 30K and the contractors that were working on the property came after her. It was a mess. She lost over 200K in the end. She was maxing out business and personal credit cards just to be able to sell the flipped property."

That's sad.

Doesn't answer the question.

[Avs19]

The S Corp was not paying off the personal loans nor reimbursing the shareholder. The shareholder was paying off the personal loans with her own money.

[TaxGuyBill]

Did the shareholder make a Capital Contribution to the corporation?  Or did the shareholder make a Loan to the corporation?  Or something else?

[Avs19]

She made a capital contribution in the beginning when she purchased the house. The flip cost more than the business could afford so she was using her personal credit cards and loans to purchase materials in order to sell it. Can the materials and interest she racked up on her personal loans somehow be treated as capital or a loan?

[TaxGuyBill · Accepted solution]

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@Avs19 wrote:

Can the materials and interest she racked up on her personal loans somehow be treated as capital or a loan?

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Personal money spent for corporate expenses is a capital contribution, a loan, or an unreimbursed employee expense.  You'll need to ask more questions to the taxpayer to determine which applies.

If it is a capital contribution, look at the Instructions for line 28 of Schedule E.

[Avs19]

I'll do that. Thanks for your help!