Topic Thread

Topic: S Corp Loss/ Basis 

1.  S Corp Loss/ Basis

Posted 14 days ago
Hi Fellow Accountants,

 I have a mind boggling question regarding taking a loss and its validity. The client was a C corp with E&P of 650K. Elected to be an S corp and has an AAA of 6K. Client has a loss of 650K this year that was funded with a 400K line of credit. (personal guaranteed)
The question is can he take the loss against his C corp E&P without having any issues?

Thank in advance for taking the time to read and hopefully shed some light.

Vivian

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Vivian Gavalas, CPA
Fine Point Accounting
New York NY10018
347-504-1040
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2.  RE: S Corp Loss/ Basis

Posted 13 days ago
The S Corp. loss may not offset prior C corp E&P.  It will reduce AAA.  Moreover, C E&P does not give the shareholder increased basis in the stock.  Unfortunately, his guaranty of the corp. bank line will NOT produce basis  until he pays the bank.  He might consider a refinance or restructure of the loan as a personal loan to the bank - and his direct loan to the S corp.  I recommend that if he is able, he should pay the bank and this will give him basis  - he can then borrow personally and loan the $ to the corp.  Recent Treasuary Regulations support  loan restructuring if the loans are bona-fide.  This discussion is presented for general consideration and no formal opinions are expressed.  The IRS freequently challenges basis calculations.

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Robert Barnett
CPA, ESQ.
Capell Barnett Matalon & Schoenfeld LLP
JERICHO NY
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3.  RE: S Corp Loss/ Basis

Posted 13 days ago
You should consider the stockholder's personal tax situation as well. If he has capital loss carryforwards, and he can take distributions in excess of basis, he may be able to create capital gains that may be used to offset the losses. The distribution would create tax free cash flow at the stockholder level. Of course, the corp must: (1) use up C-corp E&P as taxable dividends (favorable tax treatment), and, (2) have cash or property with which to make the distribution.

Since this is Feb, you are probably talking about LAST YEAR, which may limit your options. And begs the question: why didn't you know about it until now?

Good Luck!




Sent from my Verizon Wireless Tablet





4.  RE: S Corp Loss/ Basis

Posted 10 days ago
Will all due respect Robert, the IRC 358 says that the stock basis is equal to the basis of the assets transferred to  the corp in exchange for the stock when obtained under the code 351 (tax free transfer). I am trying to find something to support your comment because I am also in the thinking that a built in tax loss should not be touch A E&P if it can be a potential taxable gain. I came across IRC 1374 (tax imposed on built in gains) which I need to get  further clarification on what it really reads.

These tax laws just keep getting trickier. We will all have to increase our fees to make it worth while to practice accounting at this pace.

Thanks for any pointers you may provide.

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Vivian Gavalas, CPA
Fine Point Accounting
New York NY10018
347-504-1040
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5.  RE: S Corp Loss/ Basis

Posted 9 days ago
In the situation that was outlined, IRC section 358 does not apply.

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Robert Brown
ROBERT N. BROWN, CPA
Jericho NY
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6.  RE: S Corp Loss/ Basis

Posted 8 days ago
Robert,

this is becoming a great debate. I took out my text books from collage lol and read exact reference that's states that the basis is transferred to the stock holder from the C to the S.  If it's doesnt apply to the context, is the basis just to be considered after the 5 year built in gain period has expired in you opinion?

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Vivian Gavalas, CPA
Fine Point Accounting
New York NY10018
347-504-1040
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7.  RE: S Corp Loss/ Basis

Posted 8 days ago
There is no change in basis on conversion from C to S. The issue is that the C corporation earnings and profits do not increase the shareholders' basis.

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Robert Brown
ROBERT N. BROWN, CPA
Jericho NY
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8.  RE: S Corp Loss/ Basis

Posted 6 days ago
This has been an interesting discussion.

The way I see this is, the law is clear - C Corp E&P that become S Corp E&P maintains the same character, and has noting to do with S Corp basis.  Mr. Barnett stated this in his initial response.

A @351 transaction would occur upon the formation (when it was a C) taking into account @358if applicable, not on transfer from C to S status.  @1347 would come into play if the assets (not "equity" / "E&P" - which BTW  is not defined in the code) had gains that were "built in at time of status change" and would then be recognized upon disposition. Conceptually @1374 is simple, its application not so much when C's change to S's.

The initial q was regarding the loss, without basis, and we are after the fact now. It is what it is. Some type of debt restructuring to provide basis going forward would make tax sense.

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Todd Ringler
Calm Waters Consulting, Ltd.
Lindenhurst NY
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9.  RE: S Corp Loss/ Basis

Posted 10 days ago
​If you make the election spoken about in these comments, and you have distributed the AEP in entirety,   then you have no more earnings to warrant dividend treatment . nothing to fear there !

in my very humble opinion.

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Abby Alhante
KURCIAS & ALHANTE, CPAs LLC
Melville NY
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10.  RE: S Corp Loss/ Basis

Posted 8 days ago
Thanks Abby. I am going to make the election. You guys are great. It's nice to have such support. Happy tax season everyone.

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Vivian Gavalas, CPA
Fine Point Accounting
New York NY10018
347-504-1040
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11.  RE: S Corp Loss/ Basis

Posted 8 days ago
Abby:

Assuming the corporation has the cash to distribute the C corporation earnings and profits, those distributions are taxable to the shareholders'.

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Robert Brown
ROBERT N. BROWN, CPA
Jericho NY
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12.  RE: S Corp Loss/ Basis

Posted 8 days ago
In this case there is no actual cash distribution. Its a net operating loss I would like take against the C AE&P.  Shareholder actually put cash into the business along with a loan that gives him no basis.

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Vivian Gavalas, CPA
Fine Point Accounting
New York NY10018
347-504-1040
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