Interest Income or Business Income or ?

[mm9811]

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I have an S Corp who's business is loaning money.

In filing an 1120S it would seem to me that the income from loans (interest and loan fees) would be business income. However, where would it be listed line 1 (gross receipts or sales) line 5 (other income) or schedule K 17a (investment income).

If it is listed on K 17a, then the business is always going to show a loss as there would be now income listed on lines 1-6.

What do you think?

[Skyhawk]

A financial institution is not eligible to be an S-corporation, and an S-corporation that has 25% or more in investment income would be disqualified, that is the election would be revoked. The plan you propose would not qualify to be an S-corporation. Further you need to be licensed to loan money in every state that I know of. Check with your state regarding financial institutions/money lending operations.

[mm9811]

Thanks for the reply Skyhawk. My intention is to loan money just to a few friends or my own corporation/partnerships. As I am not holding my self out as a public lender I would think this is okay. Am I wrong on that? Would same problem apply to LLC's or schedule C or?

As to investment income. I guess I was thinking that say making a 2nd trust deed on my friend Charlie's house, it is more of a business and risk undertaking. Certainly, I am determining value, risk, appropriate rate etc. In my mind this is different than say investing in a bond fund or something that just throws off interest income.

Thanks in advance for your help.

[skier_j]

Entity issues aside, and Skyhawk is correct, the issue here is trying to turn investment income in to something you like better---it won't happen.

I have done some research on this very issue.

This is investment income, interest, maybe some late fees and perhaps some other fee income, it is NOT ordinary income or income from operations and there is no way that I am aware of, that you can turn it into anything other than investment income---without being classified as a bank or security dealer.

Assuming you do file an 1120S,,,,, the interest income will not go on the page one, it goes on page 2, Line 4.