Interest expense purchase buyout partner

[Winnie5911]

Hello,

I was asked to do a return for an individual who bought out his partner in their S-Corp.  He is making payments to that partner.  Does the buyout loan amount with payments/interest expense get recorded on his S-Corp books?  If not, where on the 1040 do I list his interest expense for the loan to buy out his partner.  Thank you.

[sjrcpa · Accepted solution]

Does the buyout loan amount with payments/interest expense get recorded on his S-Corp books?  No

where on the 1040 do I list his interest expense for the loan to buy out his partner? Schedule E page 2 separate line called interest expense

[Winnie5911]

Thank you, but I'm not seeing the line interest expense.  Please help with my indoor blindness and tell me the line number.

[abctax55]

1)  S-corps don't have partners.   Let's make sure we are discussing the same thing

2)  There ISN'T a specific line for it.

3) Disclose the actual software you are using, and perhaps more guidance will be forthcoming as to where to enter it in the software to get it to populate on the correct 'line'. 

[Terry53029]

Did the S Corp buy out the shareholder or did one shareholder sell to another shareholder. S Corps don't have partners. If the buy out is shareholder to shareholder you have an instalment sale, and in order to use the instalment method there has to be a gain. Suggest you research pub 537

[Winnie5911]

Thank you for the questions as I dug out a more clear picture of the past.  I was asked to amend a 1040 to include the interest expense  for the amount the individual paid on the loan to buyout his partner.  I was told the buyout was in 2016.  2 guys made a S-Corp and a K1 was issued/received in 2015-2019. 

(On the S-Corp return in the tax software is a K-1 (1065) form.  The prior preparer might have had this in the file by accident or something, don't know why.  I should not have listed anything about this in my question.)

The old partner is listing the self financed loan interest income on his tax return, so he wants to include the expense on his return.  He has never claimed this expense before.  I just took over this practice and the returns were done in ATX software.  I am moving over to ProSeries for 2020.  I thought I would amend in ATX instead of doing the return from scratch (entering & amending) in ProSeries. 

I was thinking to enter on 1040 Schedule 1, part I additional income, line 8 as negative income. 

[Winnie5911]

Shareholder bought out other shareholder.  Yes installment sale.  I am on the buyer's side. 

[abctax55]

"...I was thinking to enter on 1040 Schedule 1, part I additional income, line 8 as negative income"

Wrong.   It needs to hit Sch E, page 2

I use Lacerte, so I can't help with the "how" to do it in PS.

[Terry53029]

Your client has investment interest expense, and that would go on Schedule A, and possibly 4952. He will have to itemize to take advantage of the interest expense.  

[abctax55]

IF the stock purchase meets the requirements as discussed here, and in IRS Notice 88-37, the interest does go to Sch E page 2:

https://www.hhcpa.com/blogs/income-tax-accountants-cpa/interest-expense-related-to-acquisition-of-a-...

In Lacerte, it's entered as an "un-reimbursed" expense, and generates a diagnostic that 'generally' an S-Corp shareholder doesn't get to deduct un-reimbursed expenses anywhere other than Sch A.

Interest on acquisition is handled a bit differently.

[qbteachmt]

"(On the S-Corp return in the tax software is a K-1 (1065) form. The prior preparer might have had this in the file by accident or something, don't know why. I should not have listed anything about this in my question.)"

Yes, you should. That is important information. An S Corp would send a K-1 from the 1120S. If you have a K-1 from a 1065, that is a Partnership return.

"2 guys made a S-Corp and a K1 was issued/received in 2015-2019."

But it seems they never filed as the S corp and kept filing as the 1065? You need to investigate further and get proof; don't rely on what they tell you.

"I was told the buyout was in 2016."

Then your client, as the seller, would not keep getting K-1 at all.

And selling one part of a 2-partner entity to the other partner means the partnership was dissolved. So, you don't need to find proof of anything for 2017-onward, because technically, your client is not a party to this other entity from the point of sale.

At least, that's what now appears to have happened.

[Winnie5911]

Thank you.  It took forever to figure how to get in software.  I also have found (because of you)

https://www.irs.gov/pub/irs-drop/a-08-65.pdf

To show me which field.  I copied above in case this helps another person.

https://www.hhcpa.com/blogs/income-tax-accountants-cpa/interest-expense-related-to-acquisition-of-a-...

Was also helpful. 

[Winnie5911]

Thank you for your help.  I replied to the first posting with 2 links that could help the next person.

[Terry53029]

@Winnie5911  If it qualifies, in pro series pro, click on where do I enter? and type in "UPE" go to line 10 and type in interest and the amount