Business loan interest deductible?

[Vottomatic]

Hey guys, quick question: I have a business loan I used to buy into my practice. I paid around $21,000 in interest on it last year. Is this deductible? And if so, where exactly does it go? TurboTax seems to be having some trouble helping me in this regard. Thanks in advance.

[centrebaseball]

I asked this exact question a month ago and got no response. Will be following to see what others say.

[Peds]

yes business loan interest is deductible.

no clue on the TT angle, but it should be schedule c.

[jfoxcpacfp]

Are you in a partnership? S-corp? Yes, business loan interest is deductible as investment interest (and unused interest is carried forward) but I c/n help with TT.

[zlandar]

Are you in a partnership? S-corp? Yes, business loan interest is deductible as investment interest (and unused interest is carried forward) but I c/n help with TT.

Interesting. Does it matter who takes out the loan? For example two scenarios:

1. Practice is a S-corp of doctors with equal ownership. New associate buys into the practice by obtaining a loan from a bank.
2. Same practice obtains a loan from a bank so a new associate can buy into the practice. Associate is obligated to pay back this loan.

In the second example I see how that would be a deductible business expense for the S-corp. In the first I thought it's a personal loan by the associate and not deductible. Or is the signer for the loan irrelevant and the only thing that matters is the purpose of the loan (buying into a business)?

[Rthoma23]

I'm surprised at how many accountants mess this up.

If you use a loan to buy-in to a practice, your interest is tax-deductible on your personal tax return, either on schedule A as "investment interest" (which can only be used to offset investment income) OR on schedule E as "business interest" which reduces your taxable income from that business. (A buy-in loan has nothing to do with Schedule C).

If you bought-in to a C-corporation, the interest on your loan is investment interest and is deducted on schedule A.

If you bought an interest in an S-corporation or a partnership, your interest may be deductible on schedule E if the following 3 conditions are met (IRS notice 89-35).

1. You materially participates in the partnership’s or S Corporation’s business operations.
2. The partnership’s or S Corporation’s assets are used solely in conducting an active trade or business and not for passive or portfolio activities.
3. No debt-financed distributions to partners or shareholders have been made.

That latter scenario is clearly a much better tax benefit.

I would say hire a CPA to help with taxes this year, but use caution. If they make a blanket statement like "all buy-in loan interest is deducted as investment interest," then RUN away. Hope this helps!

[zlandar]

I'm surprised at how many accountants mess this up.

If you use a loan to buy-in to a practice, your interest is tax-deductible on your personal tax return, either on schedule A as "investment interest" (which can only be used to offset investment income) OR on schedule E as "business interest" which reduces your taxable income from that business. (A buy-in loan has nothing to do with Schedule C).

If you bought-in to a C-corporation, the interest on your loan is investment interest and is deducted on schedule A.

If you bought an interest in an S-corporation or a partnership, your interest may be deductible on schedule E if the following 3 conditions are met (IRS notice 89-35).

1. You materially participates in the partnership’s or S Corporation’s business operations.
2. The partnership’s or S Corporation’s assets are used solely in conducting an active trade or business and not for passive or portfolio activities.
3. No debt-financed distributions to partners or shareholders have been made.

That latter scenario is clearly a much better tax benefit.

I would say hire a CPA to help with taxes this year, but use caution. If they make a blanket statement like "all buy-in loan interest is deducted as investment interest," then RUN away. Hope this helps!

So if a practice participated in the CMS AAP program when covid hit last year would that fall under the third exclusion "No debt-financed distributions to partners or shareholders have been made"?

CMS is supposed to automatically start collecting on the amount later this year. The AAP money is on the S-corp books as a loan.

[Vottomatic]

Thanks for the responses all! Yes, I bought into an S-corp. I think I figured it out, as when you input the K-1 info, there is an area where TurboTax asks if you took out a personal loan to buy in, and then asks for the interest amount, which then does drop the federal payment considerably. I was more wondering why I was still being told to take the standard deduction instead of itemizing, as the inclusion of the $21,000 in interest would put me way above the standard deduction amount; however, if this deduction goes on schedule E, then I'm assuming that does not count toward itemizing deductions, correct?

[centrebaseball]

Interesting. Great discussion.

so if I bought in this year and was strictly paid on W2 (we do not do K-1 in our Corp, we just have a bonus W2 payment at the end of the year) then any idea where that would go on TurboTax? Am I reading correctly this would go with schedule E as well?

[Rthoma23]

Thanks for the responses all! Yes, I bought into an S-corp. I think I figured it out, as when you input the K-1 info, there is an area where TurboTax asks if you took out a personal loan to buy in, and then asks for the interest amount, which then does drop the federal payment considerably. I was more wondering why I was still being told to take the standard deduction instead of itemizing, as the inclusion of the $21,000 in interest would put me way above the standard deduction amount; however, if this deduction goes on schedule E, then I'm assuming that does not count toward itemizing deductions, correct?

Correct. It does not count towards itemized deductions on Schedule A.

[Rthoma23]

Interesting. Great discussion.

so if I bought in this year and was strictly paid on W2 (we do not do K-1 in our Corp, we just have a bonus W2 payment at the end of the year) then any idea where that would go on TurboTax? Am I reading correctly this would go with schedule E as well?

As long as it is an S-Corp (not a C-Corp) and the 3 conditions are satisfied (see my above post), the interest you pay on a loan to buy in is deductible on schedule E.