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S-Corp Owner Losses Subject to At-Risk Limitations

EZTaxMartin
Level 3
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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9 Comments 9
sjrcpa
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?

EZTaxMartin
Level 3

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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qbteachmt
Level 15

"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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EZTaxMartin
Level 3

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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PhoebeRoberts
Level 10
Level 10

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.

 

itonewbie
Level 15

IF it constitutes self-charged interest and your clients materially participated in the S-Corp, you'll need to compute the limitation for §1.1411-4(g)(5) offline.

This exception should be reported on Line 7 of F.8960 and the entry is found under Taxes > Other Taxes > Schedule J, Recapture, Other Taxes.  On the input screen, scroll down to the Net Investment Income Tax (Form 8960) section.  On the line for Other modifications to investment income [Adjust], enter the amount you computed offline.

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itonewbie
Level 15

Did I misread the question so badly that I gave a totally irrelevant response or did the OP change the post to focus on something different?

I was quite certain that the post was originally about self-charged interest and NIIT....

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qbteachmt
Level 15

Well, it is from 2020, so I would be surprised if it got changed. Perhaps you were reading two similar topics and replied inside the wrong one?

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itonewbie
Level 15

Ahhh, thanks for pointing that out.  I think you're right. 😅

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