I have a cash based S-corp that has accrued interest on a loan. Do I record the accrual as interest expense/interest payable each year and then make an M-1 adjustment for the book/tax difference since no amounts were actually paid? Once payments are being made, a 1099 for interest income should be sent to seller for amounts actually received? Or do I expense and report on a 1099 the accrued amount each year?

“I have a cash based S-corp that has accrued interest on a loan. Do I record the accrual as interest expense/interest payable each year and then make an M-1 adjustment for the book/tax difference since no amounts were actually paid? “---->I guess it depends; Sch M-1 adjustments are based on your method of accounting. Generally, tax law requires taxable income to be computed under the same method of accounting as you use for its books. For cash-method taxpayers, income is included in gross income when payment is actually or constructively received; deductions are allowable when payment is made. Accrual-method taxpayers record revenue and expenses when all three of the following have occurred: all events have occurred that establish the fact of the transaction; the amount of the tax law provides a recurring-item exception for the economic performance test. An item is treated as incurred during the tax year if all events with respect to the item have been met; economic performance occurs within the shorter of a reasonable period or 8 1/2 months after the close of the tax year; the item is recurring in nature; and it is either not a material item or the accrual in the tax year provides a better matching of income and expenses.
“Once payments are being made, a 1099 for interest income should be sent to seller for amounts actually received? “---->Correct;the 1099-int should be issued to the individual who is getting the interest payments only if the amount of the interest is over $10. Even if youdon't issue a 1099-INT, it is the seller’s responsibility to report all taxable income on his return.
“Or do I expense and report on a 1099 the accrued amount each year?”-----> You have the option (barring any rules that might limit the deduction) to deducting said interest on schedule A of 1040; but the preferred way is for the S corp to deduct it on page 1 of 1120S on line 13. And this can be done if a certain election is filed with the return. The interest portion of the payments the S corp
makes to the seller are interest income reported on Sch B of 1040 on his return aaslong as it exceeds $1,500 per year..