S corp question

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  • Roberts
    Senior Member
    • Sep 2005
    • 807

    #1

    S corp question

    A client had a C corp and he rolled it into an S corp and with that he rolled over retained earnings. Now he's looking to distribute that money in the form of a dividend and I understand all of that. My question though is this is the first year the S corp may report a loss. If it has a loss, will it reduce the amount of the rolled over retained earnings by that loss amount?

    Thanks.
  • Bees Knees
    Senior Member
    • May 2005
    • 5456

    #2
    S Corporation losses do not reduce C Corporation retained earnings. The S Corporation losses run the S Corp AAA into negative figures, while the C Corporation earnings and profits remain the same. The only way to reduce C Corporation earnings and profits without liquidating is to distribute them as a taxable dividend.

    The example in TTB on page SB3-9 makes reference to this:

    Example: Kurt owns 100% of Trumpet, Inc., a C corporation. Trumpet
    has $25,000 of undistributed earnings and profits when Kurt converts to
    S status in 2008. Kurt’s basis in the stock of the C corporation was $7,200
    before the conversion. After the conversion, the corporation passes
    through a loss of $15,000. Kurt’s deductible loss is limited to his basis,
    which is $7,200. The remaining $7,800 in losses carries over and will
    not be deductible until Kurt increases his stock basis. The loss does
    not reduce earnings and profits
    .

    Comment

    • Roberts
      Senior Member
      • Sep 2005
      • 807

      #3
      Thanks for the help.

      I'll review it in my Tax book further.

      Comment

      • Matt Sova
        Senior Member
        • Jun 2005
        • 645

        #4
        S-Corp loss

        If he does not have enough equity in the S-Corp the losses from the S-Corp may be suspended due to lack of basis. You should work with the client to help the with the costs. Perhaps he should lower his wages to prevent his S-Corp equity from going in the negative. For example if his wage is currently $200k and he is expecting a 50k loss you could reduce his wages to $150k and be in pretty good shape.

        Obviously you will want to review all of your clients information and do not rely solely on my information here.
        I would put a favorite quote in here, but it would get me banned from the board.

        Comment

        • Snaggletooth
          Senior Member
          • Jun 2005
          • 3314

          #5
          Sova Is Back

          Matt, welcome back - we've missed your keen contributions and the Michigan flavor that sometimes comes with them.

          Things are getting better - U of M could actually rebound to 6-6 this year.

          Comment

          • geekgirldany
            Senior Member
            • Jul 2005
            • 2359

            #6
            I have to say I was quite happy to see Matt's name myself

            Comment

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