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  • 1.  S Corp Loss/ Basis

    Bronze Most Valuable Member
    Posted 02-02-2018 07:27 PM
    Edited by Paraskeve Gavalas 05-01-2018 09:55 AM


  • 2.  RE: S Corp Loss/ Basis

    Posted 02-03-2018 06:40 AM
    The answer is yes, but it requires planning.

    The loss will pass thru to the taxpayer's Form 1040, Schedule C as per IRC 1366(a)(1).

    To offset the losses against the prior AE&P from the C-Corp period, the taxpayer must distribute the AE&P out of the S-Corp to trigger recognition on the taxpayer's personal return, as per IRC 1368(c). 

    However, note that under normal circumstances, the AAA is triggered first, as per IRC 1368(c)(1).  To avoid application of the normal rules and trigger the AE&P first, the taxpayer may make an election under IRC 1368(e)(3).  Note that if there are any other shareholders, the taxpayer will require their approval to make this election.  The details regarding the election can be found in Treas. Reg. s. 1.1368-1(f).  In particular, note that the CORPORATION must include a statement described in Treas. Reg. s. 1.1368-1(f)(5)(iii) in its Form 1120S for the taxable year in which these distributions are made.

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    Matthew E. Rappaport, Esq., LL.M.
    (516) 558-3377
    mer@merlawfirm.com
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    Original Message


  • 3.  RE: S Corp Loss/ Basis

    Platinum Most Valuable Member
    Posted 02-03-2018 07:39 AM

    Matt

    That response if truely beyond " S" corp tax 101"   Kudos to you , if I may.  My firm has used it to avoid dangerous situations where we find a Real estate interest in a " C" corp.  when converting it to an "S".   It is a means to avoid future tax on net passive income.

     

    But isn't there still a concern regarding basis?

     

    Is there enough basis to take the loss?

     

    If the distribution is made out of AE & P will that give rise to basis?

    If the debt is corporate, does the shareholder get basis by virtue of the personal guarantee?

     

     

     

     

     

     




    Original Message


  • 4.  RE: S Corp Loss/ Basis

    Posted 02-04-2018 11:33 AM
    Abby,

    Thanks for the kind words.  In response to your questions:

    1. AE&P distributions ought to increase shareholder basis as a "non-separately computed item of income" as per IRC 1367(a)(1)(B) via IRC 1366 (a)(1)(B).  This should give the shareholder enough basis to take the loss.

    2. I haven't found any statute, regulation, or case that would give the shareholder basis in stock for personally guaranteeing corporate debt.  Of course, in the partnership context, the partner would get outside basis under the principles of IRC 752.  But the principles of IRC 1367 do not seem to allow for an increase in basis simply due to a personal guarantee.  If the shareholder is forced to make contributions to capital based on the guarantee, the shareholder would get increased basis for any contributions actually made.

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    Matthew E. Rappaport, Esq., LL.M.
    (516) 558-3377
    mer@merlawfirm.com
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    Original Message


  • 5.  RE: S Corp Loss/ Basis

    Bronze Most Valuable Member
    Posted 02-04-2018 11:37 AM
    Also if the shareholder is required to make actual payments toward the debt then each payment increases basis but merely having the debt is not sufficient.



    Vincent J. Preto, CPA
    Senior Partner
    Wagner and Zwerman LLP
    201 Old Country Road, Suite 202
    Melville, NY 11747
    631-777-1000 ext. 340

    Sent from my iPhone


    Original Message


  • 6.  RE: S Corp Loss/ Basis

    Posted 02-05-2018 10:08 AM
    Matt:

    Not sure how distribution of AE&P would increase shareholder basis unless the distribution was re-deposited into the corporation as a loan from shareholder.

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    Louis Zacarese
    ShenkerZacarese & Marks LLP
    Rockville Centre NY
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    Original Message


  • 7.  RE: S Corp Loss/ Basis

    Posted 02-06-2018 10:00 AM
    Louis,

    My thought is that IRC 1367(a)(1)(B) allows for an increase in basis for any AE&P triggered at the corporate level.  Do you think I'm looking at that provision the right way?  It seems to make intuitive sense.

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    Matthew E. Rappaport, Esq., LL.M.
    (516) 558-3377
    mer@merlawfirm.com
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    Original Message


  • 8.  RE: S Corp Loss/ Basis

    Bronze Most Valuable Member
    Posted 02-06-2018 10:42 PM
    Edited by Paraskeve Gavalas 05-01-2018 09:56 AM


  • 9.  RE: S Corp Loss/ Basis

    Platinum Most Valuable Member
    Posted 02-13-2018 12:22 PM
    I agree with Louis.

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    Robert Brown
    ROBERT N. BROWN, CPA
    Jericho NY
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    Original Message


  • 10.  RE: S Corp Loss/ Basis

    Posted 02-14-2018 11:58 AM
    Upon further review, you and Mr. Zacarese are correct and I am wrong (isn't the first time and won't be the last!)

    I misinterpreted IRC 1366(a)(1)(B).  The triggering of the AE&P does not manifest at the corporate level and will not increase shareholder basis.  Since it is treated as a dividend, the AE&P only manifests at the shareholder level, which means there is no increase to basis.

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    Matthew E. Rappaport, Esq., LL.M.
    (516) 558-3377
    mer@merlawfirm.com
    ------------------------------

    Original Message


  • 11.  RE: S Corp Loss/ Basis

    Bronze Most Valuable Member
    Posted 02-16-2018 06:46 AM
    Edited by Paraskeve Gavalas 05-01-2018 09:55 AM

      

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Discussion Disclaimer

The opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute an accounting opinion.