Amortize loan costs for K-1 S Corp

[FLAsun]

I personally took out a loan to buy in to a business which generated a K-1 for S-Corp pass through. Turbotax asks if I personally paid interest used to acquire the business, which I entered and it's properly reflected on page 2 of Sch E -- however there's not an easy way to add the loan costs (lender, title, recording fees). I know they should be amortized on Form 4562 - but TurboTax does not ask/guide for that. When I switch to Forms, I can add Form 4562 for this business K-1, but TurboTax doesn't seem to do any calculations - and does not carry the amortized cost over to my Schedule E. I could manually add it as another line on Schedule E and then override all the values - but this is a lot of overriding. Is there an easier way? or did I miss something? Business is being treated as S-Corp.

[AliciaP1]

These costs are not amortizable against business income but increase your basis in the stock you purchased with the loan.  See Publication 551 for more information on calculating your basis.

[FLAsun]

Thanks - though that's a bit confusing as 1) the accountant who prepared the K-1 for the business  said the loan cost can be amortized on 4562 and then deducted via schedule E (but unfortunately doesn't do TurboTax or know how to make it do this).  And 2) TurboTax in the K-1 guide asks if we personally paid interest to acquire the business, which it then lists on Schedule E --- so it would seem consistent that the cost we personally paid to take out the loan  should also be reported and amortized on Schedule E (vs. added to the business basis as you suggest). However, Turbotax does not continue the thought to ask if there were other costs associated with that loan.

[AliciaP1]

Since your business acquisition was shares of an S-Corp you have obtained a loan to purchase stock.  The link I provided explains how the stock basis is increased due to the loan costs you incurred, except for the interest expense.  You can compare it to having a mortgage - the interest is deductible each year but closing costs are not.

@FLAsun 

[FLAsun]

Hi Alicia and thanks again for the reply. However, reading the pub seems to counter your point. It actually says "don't add the points to the basis... deduct them over the term of the loan" -- which is what I'm trying to do. I'll include text from publication below.

Following your logic about a home mortgage, if it were a mortgage on a rental property (business expense), those loan costs would be deductible, or rather, amortized.

SO, all seems to say it should be amortized -- but I don't know how to get TurboTax to do that for this k-1, other than manually overrides in multiple places (4562 and then to Schedule E).

Any other thoughts on how to get TurboTax to do this properly - and automatically?

From Publication 551:

" If these costs relate to business property, items (1) through (3) are deductible as business expenses. Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan.

Points.

If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), don't add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. For more information on how to deduct points, see Points in chapter 4 of Pub. 535

[ThomasM125]

You are amortizing mortgage interest, so you can report it as Interest expense to Finance Purchase of Partnerhip Interest. You will see an option for this when you enter your unreimbused partner expenses, on the screen that says Gifts, Education, and Publications:

[FLAsun]

Thanks. And appreciate the screenshot/details. We can deduct the interest expense as you mentioned (or via the question about personal debt for the business).... But I'm still struggling with the loan cost /charges (ie, lender origination fee/recording fees, etc). Seems this should be amortized over life of loan -- so would think it should be on Form 4562 - and then carried on to our Schedule E since it was a personal loan (mortgage) that we used to acquire the business. I can get TurboTax to generate form 4562 for the business... and I can manually add the loan cost/asset, but have to manually calculate amortization expense for this year and then would have to manually figure out how to add to Schedule E. 

[ThomasM125]

You can enter intangible assets and amortize them in the same section where you enter partner unreimbursed expenses. You will be able to enter the number of years you want to amortize the expenses.

[FLAsun]

Hey Thomas. Thanks again for the info and screenshots -- are they from TurboTax Business? I didn't see them in the "Home & Business" version - but maybe I missed them. I started down the Business Income & Expenses section, but stopped as seems odd to enter it here when the income and expenses are already included with the s-corp / partnership K-1 (which was professionally prepared). Any additional insight? 

[AliciaP1]

My understanding is that you got a loan to purchase shares of an S-Corp, not to purchase a property to exchange for shares of an S-Corp.  Publication 551 (the link I provided originally) takes you to the section regarding the purchase of stocks (shares of an S-Corp) and bonds.  It reads:

The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock.

The bolded section refers to loan costs incurred in obtaining a loan to purchase the stocks.  It is not an amortizable cost, but increases your basis (value) of the stocks you purchased.  I didn't mean to confuse the issue by comparing it to a mortgage.

[Edited 3/30/23 | 7:45 AM PDT]

@FLAsun 

[FLAsun]

Hi Thomas: following up: are the screenshots you included from TurboTax Business? I didn't see them in the "Home & Business" desktop version - wondering if I would have to upgrade my software? I started down the Business Income & Expenses section, but stopped as it seems odd to enter it here when the income and expenses are already included with the s-corp / partnership K-1 (which was professionally prepared). Any additional insight? Or how to get TT to generate and calculate Form 4562 for the loan costs, so I can record it on Schedule E? Thanks in advance?

[PatriciaV]

No, the screenshots provided by ThomasM125 are from the personal tax version of TurboTax. However, these entries are for a partnership K-1, not for an S-Corp.

As AliciaP1 has said, your loan costs (exclusive of interest expense) add to your basis in the S-Corp stock and are not deductible or amortized. Instead, the increased basis will reduce any potential gain when you sell your stock. 

You can use Form 7203 to track your stock basis. Include the loan costs on Form 7203 Smart Worksheet Line E (Other items that increase stock basis). You may need to create this form in Forms Mode if TurboTax doesn't present the form for you to complete during the K-1 entry interview.