Scorp Basis

[Brian EA]

My client has been reporting a loss on his Scorp for the last 3 years. His common stock is $1000. He has no other asset. Can he continue to claim these losses even though his basis is only $1000?

[Bees Knees]

No. You have to reduce basis by the loss each year. If the $1,000 was his original stock basis, it was reduced by the S corp loss each year until it hit zero. Once it hits zero, no more losses are allowed, unless he sticks more money into the business, or the business starts to show profits.

[Brian EA]

Thanks Bees but here is some added info

If sticking money into the business means his expenses , then he did that.eg. he purchased supplies, had repairs , utilities etc. His sales were less than his expenses.

Sales 7500

expenses 15000

loss 7500

This is the kind of scenario.

His stock is $ 1000

[veritas]

Has he loaned money to the corporation?

[Brian EA]

Sorry but no loans

[BOB W]

Loans...........

If he is putting money into his business to pay expenses, it has to be a loan. Are you using a single entry bookkeeping system?????

Under double entry bookkeeping the debit would be expense and the credit would be loan from officer.

I think you are missing something in your bookkeeping system...........

[Brian EA]

He is putting money into the business from his pocket. That makes it a loan.Thanks Bob.

As far as his bookeeping system goes- It is almost non existant. He brings in a sheet of paper with all his expenses and his sales figure.

[BOB W]

Bookkeeping and Corporations..

I would never do a Corp or SCorp or LLC based on what a T/P hands to me. I'm not saying preparers don't do that, I just wouldn't do it.

If a client wants to be a corporation then it has to be full monthly accounting client that goes with it.

[geekgirldany]

Your right Bob. My previous employer wasn't as detailed as I have learned that you must be. He would take a piece of paper from the client and do the return. But flash forward and I can see problems popping up. For example, no stock basis ever tracked, distributions never recorded in prior years, shareholder loans never recorded, balance sheets not prepared, etc. But he has never been audited.

This becomes a big problem if and when they want to sell the company. If based on value of stock. I've learned to get down to the details if I can. I think what takes me the most time each year is going through people's bookkeeping on their S-Corps. Trying to make adjustments and just figure out what is going on.

[Bees Knees]

Sticking money into the corporation by paying bills out of his pocket would be considered additional paid in capital. That is, capital contributions without the issuance of new stock. To be considered a loan, loan documents would have to be drawn up and a reasonable interest rate charged with a pay back schedule.

The only difference here is that calling it a loan, he gets to take it back as loan re-payments when the business eventually makes money. Paid in capital is stuck inside the corporation until he sells or redeems all of his stock.

[veritas]

So since the taxpayer is putting money into the corporation he has increased his basis for loss purposes.

[BOB W]

Yep..........

that Is correct..........

[Brian EA]

Thanks guy. You made my day