Basis to an S Corporation Is Important
Tax planning for losses is important - so if you think your S corporation will show a loss for 2014, now's the time to plan to make sure you'll get the full tax benefit. Basis will play a major factor.
Let's Review Basis.
Stock basis in an S corporation typically begins with the capital contribution you make to get the business started.* At the end of each taxable year, your stock basis is adjusted to reflect the company's operating results. If you have taxable income your basis increases. If you have a loss, your basis decreases.
As note that stock basis is also increased by capital you put into your business and your basis is reduced by amounts you withdraw, such as distributions.
Debt Basis. That's the basis you have in loans you make to your company.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. If your stock and debt basis are both reduced to zero, you get no current tax benefit and losses incurred are suspended. However, you can generally take suspended losses in future years, when you again have basis.
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.
The Solution. You can increase your basis - and your ability to take losses - by adding capital or making loans to your business.
Please call Dugan & Lopatka, CPAs to discuss how basis affects your individual income tax return. We can guide you through the rules to optimize available breaks. Call us at (630) 665-4440.
* When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.