Debt repayment on business loans for S-Corp

[diamiller52]

My Son bought a pizza business in 2018 as a Sole Proprietor.  He incorporated Jan 2019.  He then bought a second pizza business in March 2019 with an unsecured business loan (only 50,000) and used business credit cards to re-brand, advertising, etc.  He was able to pay off the loan and cards thinking it was the best thing to not have debt but now, in preparing for taxes, he finds this adds to his taxable income and creates a huge tax payment.  Just wanted to know, does this sound right?  Just wanting to get a second opinion.  I'm very familiar with Sold Proprietors but not corp.  Thank you.

[Critter]

Actually the 1120-S and the Sch C are very much the same ... so if you understand one you know both.

Now ... the cost of the purchased assets get depreciated or expensed whichever you choose to do. Other things paid with the loan are expensed.   And the repayment of the loans themselves are not deductible (since the items purchased with the card are already reported) that would be double dipping ... only the interest paid is an expense.  Paying off the loan/card to reduce interest expenses is not a bad idea if you can do it. 

I highly recommend your son to use a local professional to get educated on filing the 1120-S, get the books set up correctly and learn about the payroll requirements for owner/operators ... failure to report wages for the owner correctly is the #1 audit factor for S corps.  

[AmeliesUncle]

I agree with Critter.  Going to a tax professional for AT LEAST the first year (and continued consultations after that) is REALLY STRONGLY suggested for the corporation.  In my opinion it is crazy not to (unless your son enjoys paying more taxes, penalties and going to audits).

[diamiller52]

Thank you all so much for your input.  He does have a professional that's he's using.  That's one thing he learned from me 🙂  Thank goodness.  He has expensed all that he can.  But my question really is if he pays off 70,000 in business debt then his taxable income is increased by 70,000?  Or are his expenses just decreased by that amount?  Now maybe he just didn't explain to me right, all I know is that he owes taxes because he paid off the debts.  thank you!

[AmeliesUncle · Accepted solution]

No, paying off debt will not increase his taxable income and should not increase the amount of taxes owed.

If he has a current year loss, it MIGHT be possible that paying off the debt could affect his ability to claim that loss, but with a corporation, I can't see how that could happen.

The only thing paying off corporate debt would affect is that it isn't paying interest, so the corporation wouldn't have that deduction for interest.

Hopefully he is just misunderstanding something.  If he is doesn't understand something, he should ask the tax professional to explain it.

[diamiller52]

Thank you again.  I appreciate you taking the time.  I'll pass this on to him.  At least he'll be able to ask the right questions.