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GOT BUSINESS LOSSES? GET BASIS

December 11, 2007

The dark cloud of business losses can have a silver lining of tax refunds. If you own a money-losing S corporation, you might even be able to eliminate all of your tax for this year and get back taxes from earlier years.

But only if you have basis.

S corporation stock basis starts with your investment in S corporation stock. It increases with income and capital contributions, and it goes down with losses and distributions.

If you have no remaining basis in your S corporation stock, you can deduct losses to the extent of your basis in loans you have made to your S corporation. As with stock, this basis goes down if you take losses; any income restores debt basis before it restores stock basis.

Your basis for taking losses is determined at the end of the year, so you still have time to add to your basis for a calendar-year S corporation. While many taxpayers like to add to their basis by making cash advances, recently-proposed regulations make this a potential trap. Better to make a contribution to corporate capital, unless the business is in such dire financial shape that bankruptcy creditor status is crucial (and if that's the case, maybe you shouldn't throw good money after bad).

And no, a loan guarantee doesn't get you S corporation basis; you need to go "back-to-back," borrowing the money yourself and loaning (or contributing) it to the corporation.

If you have to borrow the money to add to your S corporation basis, be careful. If you borrow it from a "related party," the tax law might say you aren't "at-risk" for the borrowing, making your new basis useless for taking losses.

Finally, remember that you need to get past the "passive loss" rules to deduct S corporation losses.

This is part of a series on 2007 year-end tax planning. Check every day for a new one!

Tags: S corporation.year-end tax planning.