Loans to Inject Capital into a C Corp
When you borrow to inject capital into your own C corporation (or buy shares in a closely held C corp), the related interest expense falls into the investment interest category, regardless how active you are in the business. It doesn’t matter if you use the borrowed funds to make a loan to the company, contribute additional capital, or receive additional stock in return for your cash injection.
Your ability to deduct the investment interest expense depends on how much investment income you generate. For this reason, you may be better off making a “back-to-back” loan to your C corporation and charging interest at least equal to what you pay the lender.
With this method, you are assured of being able to currently deduct the interest expense under the investment interest rules, thanks to the investment income generated by the corporation’s interest payments to you. At the corporate level, your company gets a deduction for the interest it pays you. Everyone comes out ahead.
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