S Corp Shareholder Debt Basis

[S T]

I think (still pouring through numbers and basis) I have an S Corp (2 shareholders, husband and wife) that have possibly created a tax issue.

I have loan repayments that in 2006 that potentially are in excess of debt basis.

Question is,
(1) how can I minimize taxable income under Sect 1366 and Sect 1367?

(2) if I can't minimize or eliminate, how is it reported on the Shareholders tax return (1040)

(3) is there any reporting on the 1120S to trigger the form 1040 reporting

This seems to be complicated for me as it starts at a Limited Partnership return, which flows through to an S corp as the General partner, and then flows through to the husband/wife form 1040.

Thanks

Sandy

[Bees Knees]

TTB, page 7-14 under "Recapture rule - at-risk basis less than zero,” explains that when your at-risk basis goes below zero, you have to recapture and pay tax on the lesser of the negative at-risk amount, or the total amount of losses deducted in previous tax years minus any amount previously recaptured as income.

So for example, say you loan the S corp $1,000 and deducted $600 of pass through losses in year 1. Your loan basis at the end of year 1 is now $400. Now lets say in year 2, the original $1,000 loan is re-paid back to you. Your at-risk basis now drops to negative $600. You have to recapture that amount and report $600 of taxable income so that your at-risk basis goes back to zero at the end of year 2.

[S T]

Question 1120S shareholder return

Thanks for your post Bees.

I have finally worked by way through basis and at risk, T/p at risk basis is less than -0-, negative $3,000, so I have recapture and my current 2006 loss is suspended.

Question, where do I report the recapture, on Schedule E, page 2 and just show at risk recapture?

Then the statement "Do not use the recapture income to reduce any net loss from the activity for the year (2006) Instead treat the recaptured amount as a deduction for the activity in the next year (2007)"

So if a recapture of $3000 (2006) I record a deduction of $3,000 for 2007 against income?

Sorry if I am so confused.

Sandy

[Bees Knees]

If your at-risk basis went to negative $3,000 in 2006, due to loan basis that has been repaid, you report the $3,000 as income in 2006 (I would report on Schedule E on the same line that S corp losses have been reported in the past).

The $3,000 reportable income increases your at-risk basis back to zero. It does not give you a $3,000 deduction in 2007 simply for having to recapture the income.

Look at it this way. At-risk means the shareholder has to take cash out of his pocket and lose it.

Shareholder sticks $1,000 into corporation as capital and $3,000 as a loan. S corp loses $4,000 which shareholder then deducts on Schedule E.

Then the S corp repays the $3,000 loan to shareholder. Total out of pocket cash is back to $1,000 so shareholder recaptures $3,000 so his total deductions over income are now a net $1,000.

If the S corp continues to lose money, accumulated out of pocket cash and accumulated net deductible losses have to eventually equalize. At-risk rules prevent the shareholder from ever getting more deductions than actual cash lost.