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    Final Return S-Corp

    Hello all:

    I have a client who has an S-Corp with Losses every year it has operated. Roughly 69,000 in total losses - He started with giving the S-Corp 30,000 in cash - (negative basis). The S corp held land at 83,000 fmv as of 12/31/2010 of 75,000 - 2010 operating loss of 1,200. The S Corp has never had a profitable year. We are making 2010 the final return. Question I know s corp needs 4797 to show the transfer of land back to the owner. Question how should I handle the negative basis? I am assuming he can not claim the 12k loss on his return (file form 6198) However he has another S - Corp which will have a Income of 15k. 2nd question can I use the negative 12k against the income of 15K

    Thanks

    #2
    Great question

    At first thought the common sense answer is yes (if he actively participates in the profitable S Corp). I always have to remind myself that the IRS does not operate on logic or common sense.

    Your client does not have sufficient basis (or any basis at all) in the S Corp with the loss. The trouble here is you will have to file the 6198 form for the first S Corp, the loss will not carry to E2 (Sch E pg 2) and so the loss will not be allowed to offset the profit from the profitable S Corp. Be sure to review passive activity losses and at risk basis limitation rules.

    And, you guessed it, the suspended loss is gone forever, it dies with the S Corp final return. I wonder though, how did the company survive through the losses (shareholder capital contributions, loans, or business loans)? Just thinking about ways for his basis to be increased to take the loss.

    For future reference, you can offset the profits of one S Corp with the losses of another S Corp, it is a bit of a complex move involving transferring the shares of one into the other but it can be done. Here is the related article illustrating explaining the process (limited circumstances only of course but it may benefit a client in the future).

    Article here: http://www.journalofaccountancy.com/...b/20092074.htm

    Now I am going back to bed!
    Circular 230 Disclosure:

    Don't even think about using the information in this message!

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