loss carry forwards/backwards for an a s-corp shareholder that is not "at-risk"


D

David Jensen

I am unclear what carry forward/backward options an
individual has that is a shareholder of an S-corp but is not
at-risk. Can they benefit in any way from that loss? What
about if they have a DIFFERENT S-corp that they are at-risk
on either currently or in the future. Could they then use
that not-at-risk loss against at-risk gain? Are there other
scenarios where they can benefit from the not-at-risk loss?

Thanks very much for your thoughts.
 
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D

David Woods, EA, ChFC, CLU

David Jensen said:
I am unclear what carry forward/backward options an
individual has that is a shareholder of an S-corp but is not
at-risk. Can they benefit in any way from that loss? What
about if they have a DIFFERENT S-corp that they are at-risk
on either currently or in the future. Could they then use
that not-at-risk loss against at-risk gain? Are there other
scenarios where they can benefit from the not-at-risk loss?
If you are not at risk, there is no tax event, no deduction,
nothing. A different corporation is subject to its own at
risk limitations and has nothing to do with the first corp.
 
T

Tom Healy

I am unclear what carry forward/backward options an
individual has that is a shareholder of an S-corp but is not
at-risk. Can they benefit in any way from that loss? What
about if they have a DIFFERENT S-corp that they are at-risk
on either currently or in the future. Could they then use
that not-at-risk loss against at-risk gain? Are there other
scenarios where they can benefit from the not-at-risk loss?
If you are not at-risk with respect to an S corporaton loss,
the loss is suspended pending future K-1 income, or
investment in the corporation, that increase your basis. If
neither of those two events happen, the loss is unusable.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: (e-mail address removed), since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
 
D

David Jensen

If you are not at risk, there is no tax event, no deduction,
nothing. A different corporation is subject to its own at
risk limitations and has nothing to do with the first corp.
OK, I thought that your response made it very cut and dry.
Then the individual that this relates to told me that their
accountant is looking into what constitutes 'at risk'. The
accountant was considering the fact that the individual had
on 'opportunity cost' by being a salaried shareholder in his
firm (where he wants to understandably be able to benefit
from the firm's loss) at a lower salary than he was making
elsewhere before joining the firm. In other words, becuase
he made less money in that firm then he did before, he
effectively lost money in the firm and thus became 'at risk'
from an 'opportunity cost' perspective and could therefore
benefit from the losses.

Is there any precident in tax law for such a view point?
Even if this approach doesn't hold up to tax law muster,
I've got to give the guy's accountant credit for being
creative! Then again, I guess you can do time for creative
accounting! In fairness, the accountant was looking into
this, and had not given an definitive opinion on the matter
yet. Before I pass judgement on the accountant, I want to
hear what you tax guys say.

Thanks in advance.

David
 
D

David Woods, EA, ChFC, CLU

OK, I thought that your response made it very cut and dry.
Then the individual that this relates to told me that their
accountant is looking into what constitutes 'at risk'. The
accountant was considering the fact that the individual had
on 'opportunity cost' by being a salaried shareholder in his
firm (where he wants to understandably be able to benefit
from the firm's loss) at a lower salary than he was making
elsewhere before joining the firm. In other words, becuase
he made less money in that firm then he did before, he
effectively lost money in the firm and thus became 'at risk'
from an 'opportunity cost' perspective and could therefore
benefit from the losses.

Is there any precident in tax law for such a view point?
Even if this approach doesn't hold up to tax law muster,
I've got to give the guy's accountant credit for being
creative! Then again, I guess you can do time for creative
accounting! In fairness, the accountant was looking into
this, and had not given an definitive opinion on the matter
yet. Before I pass judgement on the accountant, I want to
hear what you tax guys say.
There is no basis in tax law for his position. At risk for
an s-corp shareholder is either/or stock basis and debt
basis. Nothing else. Hope this makes it 100% clear.
 
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C

Christopher Green

OK, I thought that your response made it very cut and dry.
Then the individual that this relates to told me that their
accountant is looking into what constitutes 'at risk'. The
accountant was considering the fact that the individual had
on 'opportunity cost' by being a salaried shareholder in his
firm (where he wants to understandably be able to benefit
from the firm's loss) at a lower salary than he was making
elsewhere before joining the firm. In other words, becuase
he made less money in that firm then he did before, he
effectively lost money in the firm and thus became 'at risk'
from an 'opportunity cost' perspective and could therefore
benefit from the losses.

Is there any precident in tax law for such a view point?
Even if this approach doesn't hold up to tax law muster,
I've got to give the guy's accountant credit for being
creative! Then again, I guess you can do time for creative
accounting! In fairness, the accountant was looking into
this, and had not given an definitive opinion on the matter
yet. Before I pass judgement on the accountant, I want to
hear what you tax guys say.
I don't do taxes for a living, but I think I know enough to
say it sounds preposterous.

Two concepts are being confused here, for starters: the
passive-activity at-risk limitation and the shareholder's
basis in an S corporation. They are similar in that under
either limitation, you may end up with losses you cannot
currently use and have to suspend until a year in which you
can use them.

If you are involved in a passive activity (say you own the
right to royalties from an oil well, but you do nothing but
deposit your checks), you can't deduct losses you aren't at
risk for. You're at risk for losses that you're liable to
make up out of pocket; if your oil well can lose money
without you having to pay out, you're not at risk, and you
have to suspend not-at-risk losses.

If you are a shareholder in an S corporation, you have basis
in the S corporation. Your basis is the value of money or
other assets you contributed to the S corporation, plus
profits made by the corporation, less distributions made to
you. There is a quirk in S corporation law by which
shareholder loans to an S corporation are considered part of
basis. Similar to the at-risk rules, you have to suspend S
corporation losses in excess of your basis.

Now there are two things you would like to do, but can't, so
far as I can see:

You can't use a suspended S corporation loss against another
S corporation's profits. The reason should be obvious:
allowing this would create an ability to lay off S
corporation profits against paper losses you are not liable
for. Past abuse of such schemes is the reason why there are
at-risk and basis limitations.

Opportunity cost doesn't go into basis, becasue doing so
would be double-counting. Say you give up a $100K job to go
to work for an S corp. that turns only enough cash flow to
pay you a $15K salary, you already have received the full
tax benefit of your $85K opportunity cost: you did not pay
taxes on the $85K you didn't make. If you were then allowed
basis in the S corp. for the $85K, you would be
double-counting, because now you could take $85K in tax-free
distributions or deduct $85K in losses.
 
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