Question

Taxation of Subchapter S corporation What are some of the limitations on losses and deductions that one would need to understand and be able to address within an S Corporation?

Answer 1

An S corporation shareholder reports corporate income or loss on the personal income tax return for the year in which the corporate year ends (Sec. 1366(a)). Losses or deductions passed through to the shareholder first reduce stock basis. After stock basis has been reduced to zero, remaining loss amounts are applied against debt basis (Sec. 1367(b)(2)(A)). Debt basis is not reduced by passthrough losses or deductions if the debt has been satisfied, disposed of, or forgiven during the corporation’s tax year (Regs. Sec. 1.1367-2(b)). A “net increase” first restores debt basis to the extent debt basis has been reduced by losses or deductions in tax years beginning after 1982 (Sec. 1367(b)(2)(B); Regs. Sec. 1.1367-2(c)(1)). A “net increase” is, generally, the amount by which the sum of passthrough income and gains exceeds the sum of passthrough loss, deductions, and distributions.