I am reporting interest on a loan used to purchase shares in an S-Corporation as 'business interest expense' on federal form Schedule E (2012) as a Non-Passive loss, as described by the IRS here:
How to report. If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). http://www.irs.gov/publications/p535/ch04.html
I am not a California resident, but the S-Corp does some business there and so I am filing form 540NR, but am unclear on how/where to record the 'business interest expense' in the California state forms.
Can I offset this interest expense against the S-Corp's ordinary business income in California?
If so, can I calculate the amount of interest expense to include according to percentage of the S-Corp's total ordinary income vs it's California source amounts? That is, the company's CA source amount income was 25% of it's total income, should I include 25% of my interest expense in the California Return?
Where do I record this? My best guess at this point (assuming a yes answer to #1) is to adjust the amount shown for the company's CA Sources and Credits on CA Schedule K-1(100S) by the portion of the interest determined using the method from #2 and put the result in box 17e of Schedule CA (540NR): 'CA Amounts' from 'Rental...S Corporations, etc..'
This approach seems strange to me though because the amount of that adjustment won't be recorded anywhere (except on Schedule E of my federal return, and even there, in a larger amount not showing the adjustment for the "CA portion" of the interest expense.