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Loss in S Corp

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 0,000 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 0,000 not the equivalent of an equity loan on his house?

  1. What is the Chapter and Verse that applies to this situation?

  2. If the Bank's Tax Guy is correct, how should this have been structured?

Dick

Reply to
Dick Adams
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3101,00.html 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.

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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.

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So looks to me that the tax guy is right.

Reply to
removeps-groups

Hi Dick,

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

Reply to
Katie in San Diego

PS it's like Prentiss Willson and the California State Board of Equalization said in a different matter: it's a trap for the unwary, and an opportunity for the apprised.

Katie in San Diego

Reply to
Katie in San Diego

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