I understand that interest imputed on a loan to a shareholder is reported as interest income to the corporation and an equal amount of investment interest expense is reported by the shareholder. When you look at the s corporation tax return is the offset to the interest income considered a distribution to the shareholder? What effect would there be if the shareholder had a zero basis?

Thank you,

GECZ

The Imputed interest income is not considered a distribution to the shareholder, however, it is reported on Form 1099-Int to the shareholder assuming the corporation has paid or accrued interest to the shareholder!

The corporation will deduct interest expense to the extent of the imputed interest expense paid to the shareholder for the shareholder loan (calculated at a reasonable interest rate as established by the shareholder loan agreement).

Thus, the shareholder basis consideration is irrelevent in this case. The corporation simply deducts the interest expense and the shareholder would include this amount as interest income on his or her personal tax return.

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Thanks for the reply but I'm not sure I was clear.

This is a loan from the corporation to the shareholder. It seems like the corporation would report interest income and the shareholder would report interest expense.

Also, how would the corporation report the adjusting entry on it's books. Credit to interest income and a debit to "What". And the shareholder would report a debit to interest expense and a credit to "What".