The owner of a closely-held business does not generally consider the tax implications when it is necessary to obtain financing for his business. A loan is negotiated and the borrowed funds are put to use by the business. However, in the case of a third-party loan to an S corporation,' different tax consequences may greet taxpayers conducting business as an S corporation, depending on the form of the loan transaction. Business owners adopting the S corporation form of doing business may discover that operating losses of the entity cannot be deducted due to the form of loan transactions between their corporation and third-party lenders. The purpose of this paper is to discuss the current state of the law with respect to a shareholder's ability to utilize entity-level indebtedness for the purpose of deducting S corporation losses currently.

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