2013 Winter Solstice Tax Tip: S corporation basis

December 21st, 2013 by Joe Kristan

20091210-1.JPGJust because today is the shortest day of the year doesn’t mean you can’t do some year-end tax planning.  Today is a good day for S corporation owners with losses to ponder whether they can use those losses on their 2013 return.

An S corporation owner needs to jump three hurdles to deduct losses passing through on the K-1.

There needs to be basis.

The basis needs to be “at-risk.”

The losses either need to be “non-passive,” or you need other “passive income” to enable you to deduct a passive loss.

We’ll just talk about basis today.

A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses and expenses.

Your basis is determined on the last day of the tax year, so if you are short right now, a capital contribution made by December 31 can get you where you need to be.  So look at your S corporation income, losses and distributions for this year so far, and see if you need to put some more cash in the company before year-end.  If you own all of the company, that can be just a matter of writing a check.  Don’t try to be cute and take the money back out on January 1, either.

If you have other owners, it gets more complicated.  In that case, a loan to the S corporation might be the way to get you the basis you need.  We’ll talk about that tomorrow.

Check the Tax Update for a new year-end tip daily through December 31!

 

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