Just 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!