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Now is the time to give your S corporation a year end basis check. Losses can be tough so if you think you may show a 2016 loss, you need to plan ahead to make sure you get the full tax benefits.
The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S corporation stock and certain corporate debt. This is true even if the loss reported to you on Schedule K-1 is greater than your basis.
How does basis work? Usually, stock basis in an S corporation begins with the capital contribution you make to get the company started. FYI: When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.
Your stock basis is adjusted to reflect your business’s operating results at the end of each taxable year. Taxable income will increase your basis, while losses reduce it. Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
When your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That’s the basis you have in loans you make to your company. However, once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. You can generally take suspended losses in future years, when you again have basis.
How can you increase your basis? You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.
How will basis affects your individual income tax return? If you need assistance, contact our office at 866-497-9761 to schedule an appointment with our advisors. At Summit CPA we offer multiple resources that will help get your business on the right track. By utilizing our Virtual CFO we have the capability to assist you virtually anywhere in the USA.
