How do I report interest and P&L from notes on 1120?

Question

Hello Everyone,

Could anyone please help me understand how mortgage notes are accounted and reported for the purpose of business tax return (form 1120) ? While searching the Net, I found a few different approaches - from treating them as "stocks" to OIDs to crazy complex deemed exchange schemes and pretty much everything in between.

My question is to those who have done it themselves: how did you do it? I am specifically interested in figuring the business tax return part. Any help is greatly appreciated!

Cheers

Alex

Basit Siddiqi · Answer

If you are in the business of issuing mortgages - you may need to report it as ordinary income(line 1).If you are not in the business of issuing mortgages - you may report it as interest income(line 5).

Ashish Acharya · Answer

@Alex Stepanov ,

Mortgages go line 20 of both  1120s and 1120. Just putting mortgage there is not enough. You must balance the asset and total liabilities and equity.

You shouldn't be preparing this if you had to ask that question.

Are you holding RE in C-crop? I dont know you business activities but you might have disadvantageous entity structure.

Please talk to your CPA or lawyer. This might be costing you a great deal of money.

Good luck.

Alex Stepanov · Answer

Thank you gentlemen!

@Ashish Acharya, currently it is S-corp though notes in not the primary line of business and not the main source of income so they had to take the back seat so to speak. In California, having two LLCs is crazy expensive so we chose to combine the two lines of income into one corp structure. You might have come to conclusion that we are C-corp because I failed to properly mention the form (1120s) but regardless, you are absolutely correct saying that we need to seek professional help.

@Basit Siddiqi - we are not issuing mortgages. The question was - how do we classify the asset? Reporting the interest is fairly straightforward, but when we get to calculating the basis and amortization, then things become a bit more interesting