Because of the prolonged recession we expect to see many businesses report losses from their 2009 operations. Losses from S Corporations are deductible on a taxpayer’s Form 1040 only to the extent of the shareholder’s stock plus debt basis.
Tax preparers should maintain the following two worksheets (courtesy Small Business Taxes and Management) for each of their S Corporation shareholder clients:
S Corporation Shareholder Stock Basis Worksheet
Stock basis at start of year _________ Excess deductions/losses from prior years _________ Net _________ Plus--Increases: Ordinary business income _________ Net income from rental activities _________ Interest income _________ Dividend income _________ Royalty income _________ Net short-term capital gain _________ Net long-term capital gain _________ Net gain under Section 1231 _________ Tax-exempt interest income _________ Other income _________ Section 179 recapture on disposition of assets _________ Depletion (but not oil and gas) in excess of basis _________ Life insurance proceeds _________ Other increases _________ Contributions to capital _________ Less--Decreases: Ordinary loss _________ 50% of meals and entertainment (1) _________ Section 179 expense deduction _________ Charitable contributions _________ Deductions related to interest, dividends, etc. _________ Interest expense on investment debt _________ Other nondeductible expenses (2) _________ Net loss from rental activities _________ Net short-term capital loss _________ Net long-term capital loss _________ Net loss under Section 1231 _________ Foreign taxes _________ Oil and gas depletion _________ Other decreases _________ Distributions (not in excess of stock basis) (3) _________ Basis _________
(1) The 50% of meals and entertainment expenses that are not deductible still reduce your basis.
(2) Other nondeductible expenses can include fines and penalties.
(3) Distributions can include actual cash or property payments to shareholders or the payment of a shareholder’s personal expenses.
S Corporation Shareholder Debt Basis Worksheet
Debt basis at start of year _________ Plus: Loans made during the year _________ Less: Loan repayments _________ Excess losses/deductions from prior years _________ Losses/deductions in excess of stock basis _________ Distributions (not in excess of debt basis) _________ Basis in debt _________