Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside — the corporate loss may give rise to a personal tax deduction.
S Corporation Basis
Standing between an S shareholder and the loss deduction is a tricky tax computation known as “adjusted basis.” Under the tax law, you have to limit your loss deduction to your adjusted basis in your corporate stock and in any debt the company owes you.
Adjusted basis, essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss. The order in which you increase or decrease the stock basis is very important. You can find out more information about how to calculate the S corporation basis on the IRS website.
S Corporation Loss
If you anticipate an S corporation loss for the year, as an S shareholder you should find out whether you will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end. In the case you have loss and deduction items in excess of stock and/or debt basis you have to suspend them and carry them over to next year. You also need to be mindful that a distribution in excess of stock basis represents a capital gain. When you give us a call today, our tax professionals can offer guidance so that the transaction will pass IRS muster.