Suspended S Losses

[Corduroy Frog]

1. What happens to a suspended S corp loss if the shareholders sell? Is the loss added to basis at that point similar to disallowed rental losses?

2. Same as above, except the shareholders donate their stock to a family member? Do the beneficiaries inherit the suspense loss or does it somehow go away?

[Bees Knees]

It depends on what suspended the loss. If the loss was suspended due to the passive activity loss limitation rules, all suspended passive losses on the activity are allowed in the year the activity is disposed of (TTB page 7-10). If the loss is suspended under the at-risk rules, the loss is a deduction in the following year, subject again to the at-risk rules (TTB page7-14). In other words, unlike the passive loss rules, you can never deduct a suspended at-risk loss until a year you are at-risk for the loss. If the S corp stock is sold or liquidated, and the shareholder is never at-risk for the suspended loss, the suspended loss is never deductible.