June 28, 2018 9:51 pm

Basis in Your S Corporation

If you run your business through an S corporation and it produces losses, you can deduct them on your personal return only to the extent of your basis in the S corporation’s stock and debt. When it comes to debt, two recent cases illustrate how you create basis.

Co-borrower. The taxpayer owned a nursing home that was operated through an S corporation. The corporation obtained third-party loans and the owner was designated as the co-borrower. He deducted losses passed through from the corporation based on his belief that being a co-borrower created basis. A federal appeals court disagreed. Because none of the loans were to him but rather to the corporation, they did not automatically create basis. There must be an economic outlay toward the corporation’s debt in order to create basis (Bobby R. Hargis, CA-8, 6/22/18 at https://law.justia.com/cases/federal/appellate-courts/ca8/17-1694/17-1694-2018-06-22.html).

Judgment against owner. The taxpayer owned a real estate development company operated through an S corporation. She guaranteed a third-party loan to the corporation. When the corporation defaulted, the lender sued and obtained state court judgments holding the owner and the corporation jointly and severally liable for the remaining debt. The owner then deducted losses passed through from the S corporation, claiming that her basis in the corporation was increased just by virtue of being liable for the state court judgment against the corporation, even though she had not made any actual payments towards the debt. An appellate court said the judgment holding the owner liable (as guarantor) for the corporation’s debts is not enough to create basis. Until and unless the owner pays all or part of the corporation’s debt, the corporation is not indebted to her, and without such debt, there is no increased basis (Rupert E. Phillips, CA-11, 5/17/18 at https://law.justia.com/cases/federal/appellate-courts/ca11/17-14439/17-14439-2018-05-17.html).

Tax Glossary

Useful life

For property not depreciated under ACRS or MACRS, the estimate of time in which a depreciable asset will be used.

More terms