Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside
–– the corporate loss may give rise to a personal tax deduction.
Standing between an S shareholder and the loss deduction is
a tricky tax computation known as “adjusted basis.” Under the tax law, a shareholder’s loss deduction is limited to the shareholder’s adjusted basis in his/her corporate stock and in any debt the company owes the shareholder.
What is adjusted basis, anyway? Essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss.
If a net operating loss is anticipated for the year, S shareholders should find out whether they will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end. Our tax professionals can offer guidance so that the transaction will pass IRS muster.