Expert: Arthur Naman - 1/26/2010

Question
I purchased a business four years ago (S-corp stock purchase) with only seller-financed (personal) debt.  I am considering an SBA loan at a lower interest rate and extended terms, which would essentially convert the personal debt to corporate debt with a personal guarantee.  According to the loan officer, the bank would pay off the existing note, and the corporation would incur the debt.  Currently, I deduct the acquisition interest on my federal taxes.  Are there any tax consequences of handling it in this way?  Thanks!  

Answer
As I understand it, the seller financed your purchase of the S Corp. Thus the debt is yours, not the corporation. I believe you can deduct this interest. It is not personal interest as interest on consumer purchases.

As non-consumer interest interest, it is not deducted on Sch A. I believe it is properly deducted as a Sch E expense -- please review page two of Sch E where partnerships, S Corps and fiduciary income and expenses are deducted.

As it your personal debt, it is not the S Corp's debt; thus I do not agree with the loan officer -- that the S corporation should pay off the original debt. The S Corp may lend you the funds and you can then payoff the debt.

Please keep in mind that this is a forum for bookkeeping and accounting questions, which this issue is not. It is a tax question. I would encourage your asking this question to some of the experts in that forum.

In other words, I may be wrong is my advice above.

Also, please seek the advice of the tax professional who will be assisting with the preparation of your personal and C corporate returns. That is really the person who will show the item on the tax return and thus determine the correct treatment.