Basis worksheet - new requirement to attach to 1040?

[OldJack]

I’m not sure what your point is, but this whole thing seems to have started with your assertion that a basis worksheet shouldn’t even be an issue since the 6198 is probably attached anyway.

I am very familiar with basis computation and did not imply that it was the same as at-risk. I am well aware of the difference. However, the form 6198 will calculate the the loss limitation which basis is a part of the calculation, thats what it does. Have you ever determined loss limitation for a S-corp loss?

1) Not for this purpose as personal guarantee does not apply.

2) Not from the loan itself as a personal guarantee does not add shareholder basis for purpose of deducting a loss, but the shareholder may very well have basis in the corporation that would allow the loss deduction.

How about addressing my previous question regarding a partnership entity debt?

[Armando Beaujolais]

Its called corporations with good capital that don't really need to borrow (ie: CD's in the same bank in excess of loan) but do so to establish credit lines for future borrowing when large future contracts or jobs are going to need big money and/or large established credit lines. Why would the bank need personal guarantees? Why would you be skeptical about that? You don't have clients that do that?

No, I don't have clients who do that. And I know that because I don't have clients like that, it doesn't mean it's not done. My clients are probably at a lower end of capitalization, maximum a couple million. I'm willing to be edified as to how it works and what factors are involved.

The corporations I deal with are closely held. I'm having trouble with the "nonrecourse" designation. I could buy a house with nonrecourse loans from all the credit cards that want me to borrow from them, but I'm an individual and I can't decree myself out of existence like a corporation could, and I've built up a credit rating over decades and the samplings tell the lenders I'm a good risk. I'm curious as to what it would take for an S corporation to build up credit for nonrecourse loans. Being nonrecourse seems to mean that the CDs are not pledged as security for the loans. If that's the case, and I'm a lender, I'd be worried about what would stop the corporation from cashing the CDs as soon as the loan was approved.

How does it work? How long does it take to build up trust with a lending institution? I'll stop being a smart alec long enough to listen to a different perspecitive. I promise.

[OldJack]

Armando post

Armando, we are not talking about long-term loans here and in most cases we are only talking days or a couple of months. The specific corporation I had in mind when I made the comment has been with the bank for many years, 30-40, I don't know as I have only had the client somewhere around 22 years. I have also seen where the corporation owned signed contracts that assured the corporation of profits that I am sure influenced the bank and provided security. I might point out that most such loans require the corporation to restrict or limit distributions from the corporation to shareholders. The fact that the corporation is an S-corp does not mean it can't be a very profitable business especially from a cash flow point of view. True, most financial institutions demand personal guarantees from S-corp shareholders. True, there are some wealth shareholders that refuse to provide personal guarantees. I hope you didn't think that I am a smart alec as your comments did not give me such thoughts.

[Bees Knees]

1) Not for this purpose as personal guarantee does not apply.

2) Not from the loan itself as a personal guarantee does not add shareholder basis for purpose of deducting a loss, but the shareholder may very well have basis in the corporation that would allow the loss deduction.

1) Wrong

2) Correct

1) Your answer is wrong because at-risk DOES apply to personal guarantees. Section 465(b)((2): "For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he (A) is personally liable for the repayment of such amounts..."

In my example, the S corp shareholder who personally guarantees a third part loan is "at risk" according to the cited code section.

The point is, here is an example where the at-risk rules would allow the loss, or rather, not limit the loss. It is the general basis computation for S corporations under Section 1367(b)(2) that limits the loss because personal guarantees do not increase basis; only direct loans do.

[Bees Knees]

How about addressing my previous question regarding a partnership entity debt?

The difference is that in a partnership entity, the personal guarantee would increase basis. The at-risk rules come into play more in the partnership realm because all debt increases a partner's basis in a partnership, including nonrecourse loans. The at-risk rules then have to step in to limit deductible losses to those debts the partner is actually liable for.