S corp question

[Roberts]

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]

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.

[Roberts]

Thanks for the help.

I'll review it in my Tax book further.

[Matt Sova]

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.

[Snaggletooth]

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.

[geekgirldany]

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