S corporation losses have deduction limits

S corporation losses have deduction limits

Are you expecting losses in your S corporation this year? You already know S corporation losses are reported on the business tax return on Schedule K-1 of Form 1120S, and from there flow to your personal return.

What you may be less clear about is how much of the loss you can deduct on your personal return — which might not be the entire amount. Here’s why: S corporation losses are limited by your basis in the company, as well as by other tax provisions.

Basis is broadly defined as the total of the amount you have invested in the business (stock basis) and the funds you loan your company (debt basis). Stock basis starts off with the amount you pay for your stock and increases or decreases with income, deductions, and distributions. Debt basis consists of loans you make to the company, and rises or falls as qualified loans increase or are repaid.

Even if you have enough basis to deduct current year losses in full on your Form 1040, other rules may prevent you from claiming the entire amount. Those rules include how much you have “at risk,” which is typically the total of corporate borrowings you’re personally liable for, or for which you’ve used your own property as collateral.

Finally, deductible losses can also be limited when you do not materially participate in the business.

Please call if you anticipate a business loss for 2012. We’ll help you analyze your basis.