Passive Loss Revisited

[JG EA]

My client is a 25% shareholder in an S Corp. The corp is far away and he does not materially participate. the corporation's income is in interest and capital gains - its loss is in ordinary business loss.

These are the assumptions I have been operating under for several years, but need to revisit them because the basis worksheet that the Corp sent shows my client as being able to take this year's passive loss.

1. If you don't materially participate you don't take losses
2. If you do materially participate you should also have a salary

Any conflicting arguments?

[JG EA]

So, do you think I am doing it right or wrong?

[BHoffman]

Hi JG - I could be wrong but I'll give it a try and bump.

I think he can't really be considered "passive". Maybe because that implies another class of stock, and SCorps can't do that. I think he shares in the income and gains as well as the losses, passive or ordinary, according to his percentage of ownership like any other shareholder.

If he doesn't materially participate, then I think it's OK if he takes no salary.

I also believe there are some rules regarding passive income for SCorps that used to be C-Corps. Don't know if that applies to your client.

[Davc]

"I think he can't really be considered "passive". Maybe because that implies another class of stock, and SCorps can't do that."

Disagree. He can be passive. It has nothing to do with a second class of stock, it's determined at the shareholder level.

" I think he shares in the income and gains as well as the losses, passive or ordinary, according to his percentage of ownership like any other shareholder."

At the K-1 level yes. However if it is passive at the SH level than the losses are suspended at the 1040 level.

"If he doesn't materially participate, then I think it's OK if he takes no salary."

He could still be performing service for which wages or salary should be paid without rising to the level of material participation.



I also believe there are some rules regarding passive income for SCorps that used to be C-Corps. Don't know if that applies to your client.

[BHoffman]

LOL! Well, I said I could be wrong!

Thanks Dave.

[JG EA]

Thanks for these thoughts. I will do some more research. It is discouraging to me to start things off with a lot of research, carry on for a few years with that original decision and then to find out I might have been wrong. This has happened to me several times lately. Alas and a lack.