How do I deduct the interest (investment interest, passive activity interest, business interest) on a loan I took from my S corporation?
How do I deduct the interest (investment interest, passive activity interest, business interest) on a loan I took from my S corporation?
It depends on what you did with the money you borrowed from your corporation. The tax treatment of the interest on the loan has nothing to do with the fact that you own the corporation or that you materially participate in the operation of the business. The deduction for interest is based on "tracing rules" that follow the use of the proceeds of the loan to determine whether the interest is deductible and whether any limitations apply.
Here is a table to help determine how you treat the interest for tax purposes:
|
Purpose of the loan |
How to treat the interest |
|
Buy, build, or substantially improve a main home |
Interest is acquisition debt on borrowing up to $1 million if the loan is secured by the residence; itemized deduction. |
|
Any purpose if the loan is a home equity loan |
Interest on borrowing up to $100,000; itemized deduction. |
|
Pay for higher education costs |
Interest is deductible as an adjustment to gross income up to $2,500 annually as long as your income does not exceed set limits. |
|
Pay off personal credit card debt, buy a car for personal driving, take a vacation, pay for a wedding, or for any other personal activity (other than the three purposes listed above) |
This is nondeductible personal interest-no deduction is allowed. |
|
Purchase stocks, bonds, mutual fund shares or other investments |
Generally, interest is deductible as an itemized deduction to the extent of net investment income each year; excess carried forward. If the interest is for a loan to purchase an interest in a passive activity (rental property or a business in which you do not materially participate), the interest is subject to the passive activity loss limits. |
|
Purchase of a business or for business purposes |
Interest is fully deductible. |
