Tax Minute

S-CORPORATION LOSSES

If you are the owner of an S-corporation, the income earned by the business or the losses sustained by the business flow through to your individual income tax return. However, a taxpayer can only deduct losses from an S-corporation to the extent that they have basis in the corporation. The most common way to have basis in a corporation that has losses is to lend the corporation money. But as with yesterday's Tax Minute, not following the IRS rules can cost you dearly. In this situation, a husband and wife owned multiple companies. The taxpayers' profitable ventures loaned money to one of their S-corporations. The taxpayers signed for the note personally and for the S-corporation. The funds were never actually held by the taxpayers individually and none of the notes that they signed as co-borrowers were collateralized by their own property. Even though all of the businesses were wholly owned by the taxpayers, they did not satisfy the IRS rules to show that the money put into the S-corporation came from the taxpayers. Therefore, under Audit, their losses from the S-corporation were limited due to not having basis in the business.

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