“Basis” Is Important To An “S” Corp

Posted on Thursday, August 08, 2013

Losses can be hard to take - so if you think your S corporation will show a loss for 2013, now's the time to plan to make sure you'll get the full tax benefit.

The Problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S corporation stock and certain corporate debt. This is true even though the loss reported to you on Schedule K-1 is greater than your basis.

Here's how it works. Typically, stock basis in an S corporation begins with the capital contribution you make to get the company started. (When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.)

At the end of each taxable year, your stock basis is adjusted to reflect the business's operating results. Taxable income increases your basis, while losses reduce it.

Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.

After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That's the basis you have in loans you make to your company.

Once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. However, you can generally take suspended losses in future years, when you again have basis.

The Solution. You can increase your basis - and your ability to take losses - by adding capital or making loans to your business.

Please call to discuss how basis affects your individual income tax return. We can guide you through the rules to optimize available breaks.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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