Mike

A single member LLC converts to an S-Corp this year. The owner, had taken out a home-equity loan to buy the business in an asset aquisition last year. The owner was deducting the points and interest on the loan on Schedule C. Now that there is an S-corp requirement carry a balance sheet, I'm a little confused. The owner's home equity loan does not belong on the balance sheet so I am trying to determine how to proceed. Here is what I propose: The balance of the loan at the beginning of the year is converted to a shareholder loan so the books can remain balanced. The corporation repays the loan to the shareholder with interest. The corp deducts it and the shareholder claims it as income. The shareholder pays the mortgage herself. The interest on the mortgage is also deducted by the corp through interest tracing and she posts a capital contribution each year to offset the deductible interest on the mortgage. This way the corp books stay balanced and she can take funds out for repayment and can use them to pay the mortgage. Since the corp deducts shareholder loan interest and she claims it personally as income, there is a wash - so to get a deduction for the loan to purchase the business, it is added to corporate books with an offsetting capital contribution. Does this sound like the correct approach?

Thanks all. I am sure that the investment expenses being refunded have never been deducted, since I have done all returns for this client since the partnership was formed. I'm contacting the partnership preparer to get confirmation that the same expenses being refunded are the ones being reported as 2% portfolio deductions. If so, I'll attach a statement and leave them out.

You might want to consider adding some security to it if you are going to email it. The way I do that, is to open the pdf file in adobe acrobat, not the reader program, but the full strength acrobat program. You can then save it, and add the standard security to it which allows you to add passwords for opening the pdf and for allowing or disallowing changes to it.

When I come across this situation, I always seem to jump to the worst conclusion first. Then as I uncover the facts, I am better able to determine the client's intention. Most clients, I find, dont' really want to cheat, they just don't understand the connection of everything and the ramifications of it all. As there adviser, I inform them and from that conversaton I assess whether they are going to be a client going forward or not. As for your situation, I think your stance is proper until you find out the facts and if it turns out that the income is under reported, corrections or walking papers are in order.

However, these fees were never deducted because they were 2% misc itemized fees and never enought to be over 2%. The investment fees are always passed through on line 13 J and deducted by the taxpayer, if able. For this client, he is not able to deduct them. If the refund is taxable the client is taxed on a refund that was never deducted. Is this a supportable position?

Client has a K-1 for a family partnership (1065) with investment income, gains, etc. The K-1 also has an amount in box 11 A, for misc income which turns out to be noted as "return of investment fees". The investment fees are always a 2% misc itemized deduction and the client has never been able to deduct them as they never reach the 2% threshold. Is this amount included as taxable income?