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Loss in S Corp
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Dick Adams
Feb 2, 2012, 2:42:44 PM2/2/12
to
Another one of my relatives who is under the delusion
that I am knowledgeable about taxation asked me to
post this.
Scenario:
1. Taxpayer is sole owner of S-Corp.
2. S-Corp has a $900,000 Line of Credit at Bank.
3. Line of Credit is secured by house and other assets
having a FMV in excess of the used portion of the LoC.
4. Due to losses in 2008 & 2009, Taxpayer's basis in
S-Corp is zero.
In 2010:
a. S-Corp had net income of $200,000;
b. Taxpayer received a W-2 for $300,000 and
a K-1 showing an S-Corp loss of $100,000.
c. Taxpayer paid income taxes on $200,000.
Problem:
Bank has their Tax Guy review 2010 return and he says
Taxpayer cannot take $100,000 loss because it exceeds
his basis in S-Corp.
Questions:
1. Is the $100,000 not the equivalent of an equity loan
on his house?
2. What is the Chapter and Verse that applies to this situation?
3. If the Bank's Tax Guy is correct, how should this have been
structured?
Dick
--
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that I am knowledgeable about taxation asked me to
post this.
Scenario:
1. Taxpayer is sole owner of S-Corp.
2. S-Corp has a $900,000 Line of Credit at Bank.
3. Line of Credit is secured by house and other assets
having a FMV in excess of the used portion of the LoC.
4. Due to losses in 2008 & 2009, Taxpayer's basis in
S-Corp is zero.
In 2010:
a. S-Corp had net income of $200,000;
b. Taxpayer received a W-2 for $300,000 and
a K-1 showing an S-Corp loss of $100,000.
c. Taxpayer paid income taxes on $200,000.
Problem:
Bank has their Tax Guy review 2010 return and he says
Taxpayer cannot take $100,000 loss because it exceeds
his basis in S-Corp.
Questions:
1. Is the $100,000 not the equivalent of an equity loan
on his house?
2. What is the Chapter and Verse that applies to this situation?
3. If the Bank's Tax Guy is correct, how should this have been
structured?
Dick
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
removep...@yahoo.com
Feb 2, 2012, 6:09:23 PM2/2/12
to
Losses or Deduction Flow-Through
If a shareholder is allocated an S corporation loss or deduction flow-
through, the shareholder must first have adequate stock and/or debt
basis to claim that loss and/or deduction.
END QUOTE
>From what you wrote it looks like the stock basis is zero. But
because of a loan from the shareholder to the S corp, there is now
debt basis of 900k. However the same page says that the 900k must be
a personal loan, not just collateral:
BEGIN QUOTE
A shareholder is only allowed debt basis to the extent he or she has
personally lent money to the S corporation. A loan guarantee is not
sufficient to allow the shareholder debt basis.
END QUOTE
So looks to me that the tax guy is right.
Katie in San Diego
Feb 10, 2012, 1:45:02 PM2/10/12
to
On Feb 2, 11:42 am, rdad...@panix.com (Dick Adams) wrote:
The tax guy is right. An S corp stockholder gets debt basis only from
loans made by the sh directly to the corporation. A personal
guarantee of the corporation's debt does not give the sh basis. See,
e.g., Rev. Rul. 87-121, 1987-2 CB 217, Chapter & verse is IRC Sec.
1366(a)(3)(ii) and Reg. Sec. 1.1366-2(a)(1)(ii).
Whether the $100K (or the whole $900K) is equivalent to a home equity
loan is irrelevant to this issue.
The stockholder should have borrowed the money from the bank himself,
secured by his home and whatever other assets, and loaned it to the
corporation. Then he would have debt basis to deduct the loss.
Katie in San Diego
Katie in San Diego
Feb 10, 2012, 1:52:25 PM2/10/12
to
On Feb 2, 11:42 am, rdad...@panix.com (Dick Adams) wrote:
Equalization said in a different matter: it's a trap for the unwary,
and an opportunity for the apprised.
Katie in San Diego
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