My LLC purchased a promissory note in 2017. Where do I report the expense on form 1065?

[laurab1]

My LLC does business investing in securities, financial instruments, real estate and consulting services.  This year the LLC made most of its income from consulting fees.  However it purchased a sizable interest in a promissory note.  I understand where to report the gross income but do not know where to report the expense of purchasing the promissory note on form 1065

[AmandaR1 · Accepted solution]

Purchasing a promissory note is never considered an expenses. It is either an asset or liability and you report interest income or interest expense. The value of your business is increased by the amount as an asset on your balance sheet.  

This information is only reported on 1065 schedule L if your business exceeds certain criteria (the software asks relevant questions).

If you qualify as a Dealer, then it is still only reported as a sale of business property when sold (never expensed when purchased). Some resources for this information:

• Business expenses do not include promissory note: https://taxmap.irs.gov/taxmap/pubs/p535-016.htm
• Investments, dealers and traders: https://www.irs.gov/taxtopics/tc429
• Good blog article summarizing the issue: https://finance.zacks.com/tax-implications-promissory-10510.html