Investment Interest deduction if buying an LLC with a personal, unsecured LOC and a credit advance?
Tuesday, March 9th, 2010 at
12:35 am
Dr Oz asked:
Trying to get a grip on this. I am a first time business owner this tax year. I bought a minority equity stake (<20%) in an LLC. The money I used to purchase came part from savings and part from loans. The loans were a combination of a credit card loan (at 5%) and a personal LOC (at 8%). The interest I have been paying on these loans...can I claim this as an investment interest deduction? I can't seem to get a clear answer from what I am reading.
Trying to get a grip on this. I am a first time business owner this tax year. I bought a minority equity stake (<20%) in an LLC. The money I used to purchase came part from savings and part from loans. The loans were a combination of a credit card loan (at 5%) and a personal LOC (at 8%). The interest I have been paying on these loans...can I claim this as an investment interest deduction? I can't seem to get a clear answer from what I am reading.
I should add that I am also a senior executive at the company, so I have a daily active role in the company, how it is run etc...
AGI is $160-165K in case the info is needed for any "phase out" or 2% calculations.
Thanks in advance for any guidance.
Oz
Tagged with: Guidance • Loans • Minority Equity Stake
Filed under: Investing
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Assumptions:
(1) You are a senior executive and materially participate in the LLC (see under activities that are not passive activities for definition of material participation).
(2) You borrowed money to purchase an interest in the LLC in which you materially participate. You have done so in a way that the borrowed funds are traceable to the purchase of the LLC interest. If you do not have a clearly traceable path from the borrowing to the purchase of the LLC interest, then any interest deduction may be considered unrelated to the LLC interest.
The ordinary business income from the LLC (reported to you on K-1) would go on back of schedule E. Other types of income would go where appropriate (net rental income (Sch E), interest (Sch B), dividends (Sch B), capital gains (Sch D), etc.) on the tax return. In general you would allocate the interest on your purchase loan among the various activities of the partnership in some reasonable way. You would be allowed to deduct on the back of schedule E that part of the interest on the purchase loans allocated to the ordinary business activities of the LLC. Whether you would be able to take advantage of a net loss (interest exceeds profits from the LLC) would depend upon basis and at-risk limitations. The part of the loans allocated to LLC investments would generate investment interest expense, the part of the loans allocated to rental real estate activities would generate interest deductible against the rental real estate income, the part of the loan allocated to tax-exempt investments would be non-deductible, etc. and we be reported in the corresponding place on the tax return.
This caclulation and allocation could become very complicated depending upon how many difference activities the LLC is involved in.
Richard K
Master Tax Advisor
This advice was based upon my understanding the tax aw in effect at the time it was written as it applies to the facts provided by you. See my profile for more information.