1120S First time filing. At-Risk election.

[MARLA EDWARDS]

This is my clients first time filing their scorp that started in August 2014. Only 2 shareholder.(husband and wife). They haven't sold any shares. They each loaned the scorp $17,500. They are looking at a $33,000 loss. Their 1040 income is $38,000. Can the total loss pass through and be offset? Which election of at risk limitations should i use? Each shareholder's basis is $25001

Any thoughts would be greatly appreciated. Thank you

[DaveinTexas]

Loans vs APIC

First of all, I wouldn't book these monies they contributed to the company as loans because if you do and the loans exceed $10,000, the Corporation must pay interest to the shareholder, or the shareholder must report imputed interest on the loan. Not only that but if you apply this Loan to the shareholder's flow through losses (which is required), then you have to track the basis of the loan and each payment made to the shareholders. Also, if the loan basis is not sufficient to absorb the payments made, then the payments may or may not create capital gain to the shareholders. This, I have found, drive's clients mad!! What do you mean I have to pay tax on a loan I made to "myself"???

For those reasons, I would call it either Paid in Capital, Capital Contributions or Additional Paid in Capital (APIC). Your tax software should have an adequate manner of tracking basis; if not, invest in a better tax software.

The amount they have at risk is what they contributed to the Corporation BUT you need to track their stock basis beginning in tax year 1 (2014) and carry it forward.

Use this worksheet if your software doesn't produce one: http://www.reasonablecompensation.co...-Template.xlsx

That link, by the way, is from a company that sells Reasonable Compensation Reports for S Corps; this will help prevent trouble in an IRS reasonable compensation audit (for S or C Corps).

Good luck!