What Happens to Losses When S Corporation Shareholder Basis Exceeded?

Yes, the losses are suspended and may be deducted when basis is restored by the flowthrough of net income to the stockholder or by additional capital contributions or loans to the corporation by the stockholder.

Katie in San Diego

Yes, he would have a suspended loss to carryforward.

In terms of the tax forms for the shareholder, is the carryforward loss for which there is no basis separated out from carryforward losses that do have basis? In other words, how should you compartmentalize such losses to separate them from losses in companies where you do have basis?

This is not a net operating loss carryforward; it's in a different category. There is a worksheet in the Schedule K-1 instructions to calculate your basis in the stock. The current year loss cannot be deducted to the extent it exceeds your basis in the stock plus your basis in loans you have made to the corporation. If you wish you can attach a statement to the return showing your basis and the amount of loss that is suspended because it is in excess of basis. Or you can just keep your own carryforward schedules to track the losses and their later utilization.

Basis limitations come first, then at-risk and passive loss limitations. It's all laid out in the form instructions.

Katie in San Diego