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S-Corp Owner Losses Subject to At-Risk Limitations

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Level 1
S-corp owner,  Loans money to 3rd party.  He is being paid interest on the loan.  Is the interest on this loan passive income? 
 
Since it is NOT portfolio interest, will this be passive income and also subject to At-risk limitation rules? 
 
If it is considered at risk, can this income be offset by prior year unallowed, "at risk" losses from another s-corporation owned by the same individual?
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5 Replies 5
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Level 15

Who is the lender-S corporation or shareholder?

Why isn't it portfolio income?

Why do you think it could be passive income?


ex-AllStar
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Level 1

Hello, my apologies for not clarifying. I am asking for the 1040 tax return for 2019. I do see my question may have been a little off as well though.

Basically, S-Corp 1 lent to S-Corp 2, on which the interest is earned. The individual taxpayer in question is a partial shareholder for S-Corp 2. Their spouse is a full shareholder for S-Corp 1. They file jointly and live in an equitable distribution (non-community property) state.

Hope this helps!

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Level 13

"from another s-corporation owned by the same individual"

What you have is a Shareholder. S Corps don't have "owners" per se. It would also matter if this is the Sole Shareholder for each entity, and the type of "at risk" losses from that other S corp.

What needs to be determined if you are asking about 1120S or 1040, really. That's why it's important to know if the lender is the Person or the S Corp. Because the person can have lent funds personally that they took as a distribution or a loan from the S Corp to fund that lending. This all matters.

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Highlighted
Level 1

Hello, my apologies for not clarifying. I am asking for the 1040 tax return for 2019. I do see my question may have been a little off as well though.

Basically, S-Corp 1 lent to S-Corp 2, on which the interest is earned. The individual taxpayer in question is a partial shareholder for S-Corp 2. Their spouse is a full shareholder for S-Corp 1. They file jointly and live in an equitable distribution (non-community property) state.

Hope this helps!

 

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You're asking if some or all of the interest paid by 2 to 1 constitutes self-charged interest to the shareholder of 1? I think you're going to have to do the research there; I sure as heck wouldn't rely on some internet rando for such a fact-specific issue.

If it constitutes self-charged interest, does it increase the shareholder's basis and at-risk in 1? Sure, same as any other item of income or gain. Its characterization as portfolio or passive under the self-charged interest rules doesn't affect that conclusion.

Does an increase in the shareholder's basis and at-risk in 1 affect that shareholder's ability to use prior suspended (for lack of basis and/or at-risk) losses in 3? No, basis and at-risk are specific to a given entity.