After you enter Form 1120 S Box 17 Code AD, you should be given a page to enter a description and amount. That page also advises the TurboTax doesn't report this entry on your return.
Continue past that page to one titled "Other Situations." If you check the box for "I personally paid interest on debt...", a pop-up box will appear where you can enter the amount of interest you paid. The amount you enter here will be included as a deduction against Ordinary Income for the K-1 and be included in nonpassive income(loss) described as "Interest Expense" on Schedule E page 2, Line 29b.
Form 1065 Box 20 Code AH is entered in a similar fashion, except you check the box for "I am required to pay supplemental business expenses on behalf of this partnership/LLC for which I am not reimbursed." A later page will provide a box for "Interest Expense to Finance Purchase of Partnership Interest." This amount will display in the same manner as for the S-Corp.
Please note the rules regarding this interest:
The IRS will let you treat the interest as fully deductible business interest on Schedule E if all of the following conditions are met:
- The taxpayer materially participates in the partnership’s or S Corporation’s business operations.
- The partnership’s or S Corporation’s assets are used solely in conducting an active trade or business and not for passive or portfolio activities.
- No debt-financed distributions to partners or shareholders have been made.
Such qualifying interest should be reported on Part II of Schedule E. Per IRS Notice 88-37, the interest expense should be reported on a separate line and identified as “business interest” with the name of the pass-through entity indicated. As a bonus, if the interest is related acquisition of a partnership interest, it would presumably also reduce self-employment (SE) income and therefore reduce SE tax.
Source: Champ Rick19744
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