Question

Please discuss the advantages and limitations of the loss pass-through to the shareholder from the S Corporation

Answer 1

Advantages:

1. The business income or loss "passed through" to shareholders should be on their personal income tax returns. This indicates that business losses can be used to offset other income on the shareholders’ tax returns.

2. The system of loss pass-through to the shareholder from the S Corporation can be extremely helpful in the startup phase of a new business.

Limitations:

1. Loss pass through to the shareholder first reduce stock basis. Once stock basis is reduced to zero, remaining loss amounts are applied against debt basis.

2. the loss pass-through is reported on the shareholder's personal income tax return only for the year in which the corporate year ends.

3. The year in which losses decrease stock and debt basis to zero, the losses can be deducted in that year only if the shareholder increases basis.