35. S corporation borrows $5,000 from Bank at 6% interest for one year. a. If Bi

Question

35.        S corporation borrows $5,000 from Bank at 6% interest for one year.

a.         If Bill, one of several shareholders of S corporation, signs an agreement with Bank guaranteeing repayment of the loan, he may add $5,000 to the basis of his S stock.

b.         If shareholder Bill signs a repayment guarantee he will be entitled to have his Schedule K-1 from S corporation list 100% of the loan interest paid as his deduction to the exclusion of the other shareholders.

c.          Even if shareholder Bill signs a repayment guarantee he will not be permitted to increase his S corporation stock basis by $5,000.

d.         Partnership and S corporation tax rules allowing partners/shareholders to increase the basis of partners/shareholders by the amount of partnership/corporation debt are identical.

Explanation / Answer

Option (c) is correct.

       A shareholder's personal gaurantee towards S corporation liability towards third pary cannot enhance

        debt basis. Debt basis can be increased only when a shareholder is directly giving loan to S corporation.

        In the given instance, personal gaurantee to bank doesn't increase his stock/debt basis.

        Moreover, Shareholder is not able to deduct 100% interest on loan as his deduction in Schedule K-1

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