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Frank123

TaxAlmanac

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S corp loss in excess of basis "suspended"

See original discussion at http://www.taxalmanac.org/index.php/Discussion:S_corp_loss_in_excess_of_basis_%22suspended%22


When is the loss in excess of basis deducted on the shareholder return. I understand when basis is increased but what about a total disposition or closing of the company?

Additional facts posted in a different discussion, transferred here:

Is the distribution in excess of basis treated as a short term or long term capital gain? My client has the excess distribution over a few years in a corporation that is 8 years old. Also the corporation is in debt 250k which is how my client was able to take the excess basis distributions. My client has personally guaranteed repayment and is repaying the loan to the bank. Is the excess distribution taxable? The debt is primarily the responsibility of the S corp.

( Asked 07/05/09 04:48 AM in TaxAlmanacViews by community 23 )

Answers (19)  Comments (1)  

Harry Boscoe

TaxAlmanac

"When is the [shareholder's suspended S corporation] loss in excess of basis deducted on the shareholder return[?] I understand when basis is increased but what about a total disposition or closing of the company?"

If a shareholder of an S corporation has suspended losses from the S corp, the losses will be deductible when the shareholder has enough basis to allow the deduction. If the shareholder disposes of his stock, or if the "company closes," and the shareholder never gets enough tax basis to allow the deduction of the suspended losses, he never gets to deduct the losses. It's not a big surprise, I hope, that the shareholder's allowable/deductible/deducted losses won't exceed what he invested. Sorta logical, in a way. Nothing in, nothing out. [I wanted to say "no tickee, no shirtee" but my political correctness editor didn't allow it.]

( Answered 07/05/09 01:30 PM in TaxAlmanac ,Views by community 23 )

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JR1

TaxAlmanac

So as he repays that loan, he's increasing basis, and can take deductions along the way. Or, if it's rewritten as a personal loan, same thing.

( Answered 07/05/09 01:49 PM in TaxAlmanac ,Views by community 23 )

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Actionbsns

TaxAlmanac

I'm just finishing an S corp return for a new client. There are prior year losses in excess of basis and therefore, suspended losses to the two shreholders. I'll be preparing the return for one shareholder, not sure of the other one. I suspect they both prepared their own returns last year and most likely took the loss on their personal returns being unaware that they couldn't do that. How is a shareholder supposed to know about suspended losses in this situation? Or, for that matter, a tax preparer given only a K-1? It doesn't say anything on the K-1, so I'm sure this happens unwittingly quite often. When I see the return from last year, I'm going to have to give the client the bad news and explain what I'm talking about.

( Answered 03/05/10 03:27 AM in TaxAlmanac ,Views by community 23 )

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Dennis

TaxAlmanac

If the K-1 is properly prepared, shareholder has all the information needed to keep his own basis statement. ProSeries has an entry screen for that. Of course if you have a new client with no records...?

( Answered 03/05/10 05:13 AM in TaxAlmanac ,Views by community 23 )

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MWPXYZ

TaxAlmanac

How is a shareholder supposed to know about suspended losses in this situation? I suppose most sharholders would not even think of this issue. I do send a statements along with K-1 forms that go to non-clients that summarizes the basis issue. But I do not track their basis. I have not ever mentioned "at risk" rules in the past and have considered doing so in the future, but a difference between the two limitations would be rare with my clients.

Or, for that matter, a tax preparer given only a K-1?

I guess the preparer, being aware of the issue has to send the client digging for information. If the client has held the same percentage of stock from corporate conception or has only held it a few years; the calculations may not be so bad. But calculating the basis of a new client who bought into an existing corporation a decade ago may take some assumptions or cooperation from an organized preparer of the S corporation returns.

( Answered 03/05/10 05:53 AM in TaxAlmanac ,Views by community 23 )

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Kevinh5

TaxAlmanac

the preparer, upon seeing a loss, is supposed to ask enough questions to get the return correct

if you don't ask questions to determine basis, you risk doing a return incorrectly. It the taxpayer wanted an incorrect return, he would just do it himself.

( Answered 03/05/10 03:26 PM in TaxAlmanac ,Views by community 23 )

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MWPXYZ

TaxAlmanac

Actually several clients would prefer I do an incorrect return for them. It takes quite a bit of time to do a return incorrectly especially if you want it to "appear" correct.

And many want someone else to deal with the IRS if they should come calling.

Not to stray from the original issue; but, that is why your incorrect return rate should be higher than the corrct return rate; after the audit it is harder to enforce payment of your fee for dealing with the auditor.

( Answered 03/05/10 04:30 PM in TaxAlmanac ,Views by community 23 )

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Actionbsns

TaxAlmanac

Mike, can you explain what you are talking about? Seems your philosophy is what gets tax preparers into a lot of hot water.

( Answered 03/05/10 06:31 PM in TaxAlmanac ,Views by community 23 )

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Harry Boscoe

TaxAlmanac

And some say tax accountants don't have a sense of humor. Actually it's just very very well disguised. I get you, Mike, I get you. "...it is harder to enforce payment of your fee for dealing with the auditor." I would think that it would depend on how effective the dealing with the auditor was. Like, whether it was successful or not...

( Answered 03/05/10 06:40 PM in TaxAlmanac ,Views by community 23 )

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MWPXYZ

TaxAlmanac

Good thing i'm not an actuary.

However, many (most) clients don't care if the return is "correct". They dread dealing with filling in forms (that use obtuse language) in a logical manner. These clients pay you to remove a burden. In such a way they do not pay "too much" in taxes.

I am not sure many business returns could be prepared so they are "correct". I think someone referred to an IRS study that noted 70% of S corp returns were prepared incorrectly. One major issue was "reasonable compensation". I wonder if the IRS personnel conducting the study "correctly" determined reasonable compensation.

When i commented i did not think through the possibility of successfully dealing with an auditor with an incorrect return; but as i briefly reminisce that does happen often enough. On the other hand, my trips to Appeals have been due to incorrect audits of (what must have been) correct returns.

And to return to the original issue, it is possible you may never know the precise basis of your new client's stock. And I bet you never asked any of your clients about how they financed their purchase of stock so that losses you deducted on their personal return did not violate the "at risk" rules!

( Answered 03/05/10 10:23 PM in TaxAlmanac ,Views by community 23 )

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TAFsteincpa

TaxAlmanac

25% S-Corp shareholder who is no longer a shareholder. The S-Corp was around for 2 years. 2008 suspended loss of $12,000, 2009 has a loss of $8,000. He received a W-2 in 2008 for $80,000 and in 2009 for $100,000.

2009 K-1 is marked final and there is a schedule with it that details that the $20,000 cumulative losses are in excess of basis. He put in time, not money.

SH was the corporation. The other 3 SH's were the money guys. They did no work other than provide infrastructure. No material participation.

From what I am reading, the losses are lost forever. No tickee, no shirtee as a non-PC Harry might have said.

Is there any "creative" way to legally infer basis?

Questions to ask client would be helpful or the old phrase that he is SOL is fine too.

( Answered 05/07/10 12:44 PM in TaxAlmanac ,Views by community 23 )

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Harry Boscoe

TaxAlmanac

If the shareholder didn't put anything into the S corp, he doesn't get to write anything off on his tax return. Were his shares given to him for free? And were they deemed to be worth what he paid for them? "Sans billet, il n'y a pas de chemise." My PCness editor doesn't read French. Even really bad French. Friday, is it noon yet? Refrigpbrerator.

( Answered 05/07/10 05:12 PM in TaxAlmanac ,Views by community 23 )

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TAFsteincpa

TaxAlmanac

Theoretically, thinking out loud here, had he performed services for the corp without receiving pay, then the corp would adjust his capital account and record some kind of expense, such as Wages which would then increase his taxable income that could then be offset with his suspended loss. ;-)

Trying to imagine how I am going to explain to client that while his K-1 shows losses for this year and last, he gets bubkus.

Now, from a corp perspective, he leaves the corp, no exchange received or given for his stock. That 20K loss is absorbed by the corp and is now available to the other SH's who have basis?

( Answered 05/07/10 05:39 PM in TaxAlmanac ,Views by community 23 )

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Kevinh5

TaxAlmanac

not to my knowledge

even if the other shareholders buy out the 3rd

( Answered 05/07/10 05:46 PM in TaxAlmanac ,Views by community 23 )

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Harry Boscoe

TaxAlmanac

No, the 20K loss *isn't* available to the other sh's.

You now get to tell your client that his losses were as cool as it gets, they were with OPM. That's as good as it gets. OPM isn't deductible.

( Answered 05/07/10 05:50 PM in TaxAlmanac ,Views by community 23 )

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TAFsteincpa

TaxAlmanac

Ok, so if he was still a member of the corp, he could loan the corp $20,000, or contribute that amount as a cap contribution and his $20,000 becomes a deduction. But, since it OPM, OP are SOL as well as him.

( Answered 05/07/10 06:02 PM in TaxAlmanac ,Views by community 23 )

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He could send *me* the twenty grand and I would let him deduct it as "tax advice" and I could replenish my fridge with the money. Pouring real money into a hole for the tax deduction isn't getting ahead. Unless my bank account is the hole that it's being poured into. Yes, you got it, that's yet *another* glaring example showing that a preposition is something you can end a sentence with.

( Commented 05/08/10 02:58 AM in TaxAlmanac ,Views by community 23)

Dressagecpa57

TaxAlmanac

So if I am to understand the pertinent (to my fact pattern) parts of the volley above, if a shareholder who has contributed no money, has a suspended loss from 2009 that carried into 2010 (funded by the other SH-he took his loss properly). Anyway, exiting SH has $20k of loss that will just evaporate, but the bigger concern I have is giving the funding SH credit for the exiting SH's suspended loss. I prepared the Lacerte basis schedules faithfully & provide them to my clients. So is funding SH SOL? Can I transfer the loss to him or not?

thanks-Liz

( Answered 03/14/11 04:33 AM in TaxAlmanac ,Views by community 23 )

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Two Headed Mule

TaxAlmanac

The loss is not transferred to the "funding" shareholder. The funding shareholder is SOL, but only temporarily, since he has basis in his shares. Ultimately, if the funding shareholder gets back less than he put in, he'll take a loss.

( Answered 03/14/11 01:08 PM in TaxAlmanac ,Views by community 23 )

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Dressagecpa57

TaxAlmanac

Thank you for replying! This makes sense since the money he put in is classed as a SH loan...

( Answered 03/15/11 01:37 AM in TaxAlmanac ,Views by community 23 )

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