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Loan Interest Expense Deduction for putting Money into Partnership

Forum|Forum|2 years ago
September 21, 2023
3 replies
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My client has a one-third partnership interest in a Dialysis center and had to borrow from a bank for tenant improvements. She paid about $21,000 in interest for 2022. The income/loss is reported using Schedule E. How can she report & deduct the loan interest she paid to the bank on that loan?

Thanks.

Lacerte Tax

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Best answer by TaxGuyBill

Look at the Instructions for Schedule E, line 28, debt-financed acquisition.

https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1965

sjrcpa

Level 15

Your client paid for the partnership's improvements by borrowing money?

The more I know the more I don’t know.

V

VenuRAuthor

Level 3

Yes. That's correct. The bank sent the money to the partnership directly.

sjrcpa

Level 15

How is the Partnership treating the loan funds from the bank on its Balance Sheet?

The more I know the more I don’t know.

T

TaxGuyBillAnswer

Level 15

Look at the Instructions for Schedule E, line 28, debt-financed acquisition.

https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1965

V

VenuRAuthor

Level 3

Thank You TaxGuyBill for the help. I appreciate it.

L

larrygrussell1

Level 3

Hi VenuR. I took your question to mean, exactly HOW IN LACERTE to report and deduct your partner's interest expense on her debt financed partnership capital contribution.

We have the (almost) exact situation. My client, the Son, bought his Mothers shares in her SCorp. Mom was the 100% owner. Son signed a note payable to Mom and became the new 100% owner.

For Lacerte, we record the Son's SCorp K-1 as usual. Then we record a second K-1 for that same SCorp (duplicating the same name, fein, etc) - and for the 2nd K-1 we enter the debt financed interest paid by the Son to the Mother as negative amount in "Ordinary business income (loss)". We footnote that the second K-1 is the Debt Financed acquisition interest.

We have followed this procedure for years now and have no issues to date with the IRS.

V

VenuRAuthor

Level 3

Thank You for your help in solving the problem.

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