The Deductibility of Losses from an S Corporation
Many of our business owner clients have asked us over the years to explain the extent to which they can deduct losses from their S (small business) Corporations. Below is a summary of the extent losses can be deducted by the taxpayer.
In a C corporation, a shareholder's basis in his or her stock is generally its cost. However, in an S corporation, items of income taxed to shareholders increase their basis, while distributions decrease their basis.
A shareholder's basis in his or her S corporation stock is increased by:
• Any corporate income items passed through to the shareholder;
• The corporation's income not separately computed.
The shareholder's basis is decreased by:
• Nontaxable corporate distributions that return the shareholder's capital;
• Loss and deduction items that are separately stated and passed through to the shareholder.
If an S corporation sustains a loss during the year, a shareholder's deduction is limited to his or her aggregate basis in the stock plus any loans he or she made to the corporation.
A cash or noncash distribution to a shareholder is treated as a nontaxable return of the shareholder's capital to the extent of his or basis in the stock. After that, the distribution is treated as a capital gain.
Irs.gov
If you have any questions or concerns regarding your taxes, please don't hesitate to contact any of our tax staff at (510) 235-1044.
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