S Corp and Shareholder Personal Guarantee

[S T]

What a mess this one is!

Tax client is h/w shareholder in S Corp which is the General Partner in a Limited Partnership.

Lease for Limited Partnership Business (Pizza business) was entered into in the name of the S Corp, and the h/w shareholders had to personally guarantee the lease.

Limited Partnership business was sold on an installment sale and the buyers filed bankruptcy in less than 1 year , so all is under legal action, not only the default on the note for the sale of the business under the LP, but also the lease non payments under the S Corp.

Shareholders are now having to pay legal fees to defend their right to access to the "lease space" to re-acquire the space so they can try to re-sell the business (what is left of it). As of this date they have made no lease payments, but we are sure the landlord will sue for back lease payments.

So question? where to deduct the legal fees that the shareholders are now paying personally? Where to deduct the lease payments if the landlord is successful in obtaining judgement against the S Corp and/or shareholders (H/W) for back lease payments??

An attorney set up this whole convulated scenario and seems to have put the h/w at risk all the way down the line.

Sandy

[Corduroy Frog]

Good News

not much of it, ST, but the good news is that by guaranteeing the whole world, your clients cannot be denied losses and deductions by virtue of not being at risk.

If they have the wherewithal, they should make a loan to the S corp and then pay the lawyer and possible rent out of the S corp. Loaning to the S corp enhances their ability to deduct a loss.

The real problem may not be taxes, but economics. Finding a rental customer to take over may be more important than arranging for tax deductions.

[Bees Knees]

Personal guarantees for S Corp debts do not increase basis or at-risk basis for purposes of deducting S Corp losses, until the money is actually paid.

You also have to be careful with the issue of the shareholder personally paying corporate expenses. If the corporation is liable for the expense, the shareholder cannot deduct the exense made on behalf of the corporation. TTB, page 8-13 says:

Paying Expenses of an Employer
If the expense paid by an employee is that of the employer and not
the employee, the expense might not be deductible. This could be
the case where a taxpayer is both the shareholder and employee
of his or her corporation. The shareholder employee may typically
pay a corporate expense, such as office rent, out of personal
funds when the corporate checkbook is low on funds. Since the
expense is a liability of the corporation and not the employee, the
expense is not deductible by the employee because it is not an
ordinary and necessary business expense under Section 162 (T.C.
Summary Opinion 2004-149). However, if the corporation has a
resolution or policy in place requiring a corporate officer as an
employee of the corporation to assume certain expenses, those
expenses would be deductible by the employee, subject to the 2%
AGI limitation on Schedule A. (T.C. Memo. 2005-197)