S Corp Loan Basis

[Unregistered]

I need a little help from the tax gurus.

S Corp with 2 shareholders. Basis of each shareholder is $250 at beginning of year.

Shareholder A makes a direct loan to S corp---promissory note with interest was created. Loan was for $3000 increasing A's basis to $3250.

Approx. $1500 of loan was repaid, decreasing A's loan basis to $1500.

If the S corp incurs a $4000 loss, this would reduce A's and B's stock basis to $0.

A's remaining loss of $1750 would be applied to his loan basis reducing it to $0

How do you handle the remaining $250 loss for A. Would this excess loan be taxable to A as a capital gain? Or do you hope that the S Corp has a profit next year which will increase his loan basis, and then his stock basis?

I kept the #'s simple, but you get the point.

TIA

[Armando Beaujolais]

The $250 loss carries over to next year at the shareholder level, waiting for stock or loan basis to increase. From the Instructions for Schedule E, "S Corporations."

"...Any loss or deduction not allowed this year because of the basis limitation can be carried forward and deducted in a later year subject to the basis limitation for that year."