Discussion:S-corp and distribution offset capital loss carryover?
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Discussion Forum Index --> Tax Questions --> S-corp and distribution offset capital loss carryover?
Martha Brown (talk|edits) said: | 19 September 2007 |
| I have a client that is currently a sole proprietor. He has a $200,000 capital loss carryover. He believes that if he becomes an S-corp and pays himself a $200,000 distribution, he could use his capital loss carryover to offset it. I believe he can only use $3,000 of the loss. I am not too familiar with S-corp distributions so please help. Do they only reduce basis or are they taxable? | |
| 19 September 2007 | |
| you are correct. If he creates an S corp then sells the stock at a gain, the capital gain would offset the capital loss. Whether the distribution is taxable or not depends on his basis.
HMMM, let's say he has no basis but takes a distribution - isn't that taxed as capital gain??? He might be correct under those circumstances. | |
| 19 September 2007 | |
| Very interesting idea, I do not now the answer but there is much potential here if the distributions could exceed his basis. Think I'll microwave some popcorn and watch this thread. :) | |
| September 19, 2007 | |
| Interesting thinking there Kev. So if a guy can figure a way to suck out all the cash, borrow from IRS/suppliers/etc. and fund a SEP or something...all of which would create just that kind of opportunity...he could take the cap gain and use up the losses. I've not been clear how you establish the basis then, in taking the gain, or reflect that on the corp books, or if you do at all. | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| Hold on a minute; what I see is someone investing after tax dollars into the S Corp, having some activity and profiting some amount, which is ordinary income and does not offset the loss. Then he takes out his investment over and above the profit to use up the loss....in other words creating phantom income to offset a loss. Makes no sense unless he does what JR says, steals or borrows the money. | |
| 19 September 2007 | |
| Hi sorry you are all dreaming. He has to have basis to put the $200k in the S corp now when he takes it out its a wash. bye | |
| September 19, 2007 | |
| But that's what happens in real life DT. They use other people's money to take home, and/or book a SEP which creates losses, but the money's gone. So they have excess distributions. Happens all the time. | |
| September 19, 2007 | |
| Yeah, Wes, and when he takes out that basis it is a wash. It's when he takes more that it's not a wash. | |
| 19 September 2007 | |
| HELLO where does the cash come from to take out more? Splash some water in your face JR I know its lunch time and you are probably getting drousy. And if he can sell his stock of a just created S corp at a $200k gain I have some swamp land up here in Beantown you can build on for no risk. bye :) | |
| September 19, 2007 | |
| No no, nap AFTER lunch...which I haven't gotten to, yet. There's always cash. Well, not always...but they owe they owe and use cash that should be for other things. In my own case, thanks to my year end bonus, the accrued taxes, which are the bulk of the deal, create a situation where I've distributed more than my basis until I restore that cash two weeks later to make the payment. Since I repay it, it's a note for me. But if I wanted to, I could take the cap gain, right? | |
| 19 September 2007 | |
| Hi JR we can think of alternate options until the sun goes down lets stick to the facts. This client is looking to oink. Yes he could borrow $200k money in the S corp without getting basis credit and distribute that to himself but he now has to pay the bank back which will cause a $200k loss when he puts the money back in and gets nothing in return. See now you have me thinking like everyone else lets make up crap to see if it works. PS JR I assumed you had already eaten. bye | |
| 19 September 2007 | |
| cash comes from payables that are unpaid, and corporate borrowing. S corp has loss or gain (doesn't matter, but say loss is limited because of basis) but distributions in excess of basis from not paying suppliers - happens ALL the time, Wes | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| Sorry for not thinking.....I was in a hurry to get to the Law & Order reruns on TNT. | |
| 19 September 2007 | |
| Hi sorry doesnt happen ALL the time under this question. You guys love to make up facts to fit any scenario except the question being asked. If you want to talk specfics method of accounting, money put in, money borrowed with or without basis, taxable income generated, distributions give me the balance sheet and P&L etc and I will talk the talk. But to sit here and lead someone down the path Kevin by suggesting you can sell the stock generate a gain under who knows what situation or take distributions without saying where the money came from and the facts just state this guy thinks he can set up an S corp dump his money in and take it out for a capital loss may have some merit doesnt even exist in my real world as you are fond criticizing nor in your academe land. Sorry I rant. bye | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| Could someone, please, give my a direct answer to my question. If you have, sorry I did not catch it. | |
| 19 September 2007 | |
| Hi the answer is NO he will not generate a 200K loss by setting up and S corp and dumping his money in an out. bye | |
| September 19, 2007 | |
| Sure, in short, Martha, normal S corp distributions have nothing to do with anything. Profits are taxed, and distributions are OF those profits. Now, what got us thinking is that when distributions are in excess of basis, which really does happen often, those can be taxed as capital gains. In that case, those excess distributions would offset those capital losses. | |
| 19 September 2007 | |
| my original question gave you the answer that you are correct
then I added that THERE IS a way that he could be correct, but Wes is chastising me for thinking outside the box. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| I don't know how a start up could pull this off. Mathematically, it doesn't work. Borrow money and put it in and take it. Then you have to pay back the bank with money you borrowed to start with? | |
| 19 September 2007 | |
| no, don't borrow personally, borrow through the corporation FROM SUPPLIERS via payables | |
| 19 September 2007 | |
| Hi, Kevin you always give good answers but under what circumstances does this guy generate a capital gain of 200k by putting his money in and out of an S corp. What facts are you not telling us? If your answer is that the distribution doesnt result in a 200k capital gain and Martha's thinking is correct because she KNOWS THAT and therefore the client gets a $3000 loss against other income lets all go home.I think poor Martha has no background in this area and hasnt the foogiest idea about your answer. Sorry but we must beat this horse some more. Martha do you understand your client gets no fabricated capital gain? bye | |
| 19 September 2007 | |
| include items in COGS, but don't pay for them.
Instead, take sales income and pay a distribution to the shareholder. | |
| September 19, 2007 | |
| Over time, Wes. Not now, and not all at once. C'mon, you've never encountered excess distributions? We're not talking about creating anything here, merely using the rules of taxing excess distributions to offset those losses over time. | |
| 19 September 2007 | |
| sale $100
Cogs = $75 net profit = $25 this increases S corp basis by $25 BUT cash = $100 because you never paid for COGS yet pay $100 distribution first $25 is reduction of basis, next $75 (in excess of basis) is capital gain | |
| 19 September 2007 | |
| Wes, no one ever said that he puts in HIS $200,000, he is pulling it from the checkbook because he never paid his suppliers!!! | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| I guess what is bugging me is that a capital loss is almost an asset in a way, a bank you can draw on.....so why try to manufacture capital gains to offset it. Have him start a successful business, or invest in real estate, or something which might generate capital gains ten years down the road.....at that rate he will have only used 30K of his carryover.
Or simpler, assuming he is not at death's door, advertise for a bride who has unrealized capital gains! | |
| 19 September 2007 | |
| If he is at death's door, it would be more imperitive - because the unused losses will expire when he does. | |
| 19 September 2007 | |
| Wanted: one woman with highly appreciated portfolio, bass boat and trailer. Send picture of boat and trailer. | |
| 19 September 2007 | |
| I'm with Wes here. Money that has to be returned to pay the supplier cannot be classified as a distribution. | |
| 19 September 2007 | |
| ah, but it was taken as a distribution in year 1. You are doing year 1 tax return and don't know yet what will happen in Y2.
Y2 sales could generate enough profit to pay Y1 suppliers. | |
| September 19, 2007 | |
| You guys ever notice how our government does business? You pay last year's bills out of next year's income. That's what most of us do. | |
| 19 September 2007 | |
| That kind of gets into the area of preparer competence. If you do returns without knowing what happened after year end... ♫ | |
| 19 September 2007 | |
| ???
Let's see, the due date without extensions is 3/15. When does ANY preparer know what will happen the following December? | |
| 19 September 2007 | |
| Certainly we have all seen many of our small business owners withdraw (enough to live on) in excess of the profit and often in excess of the basis. | |
| September 19, 2007 | |
| You guys need to do more small businesses. About a third of my S's have excess distributions at one time or another. It's real life, not made up stories. | |
| 19 September 2007 | |
| Kenvin we are beating our heads against the wall he has to set up an S corp the money comes from HIM. I could give a @@##!!! how he got it. STOP PLEASE I give up on all these efforts to make your point. ANSWER the question for poor Martha yes or no. Does he get a capital loss by putting money in and out of a new corporation? bye | |
| 19 September 2007 | |
| Wes re-read her question. She never said he put ANY money in his corporation. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| My question is rather simple.
Why in the hell would I want to MANUFACTURE income that isn't really income. That is just nonsense to start with. Take the $200k loss carryforward out of the equation and then ask "Would you do this?". No. Suppliers HAVE to be paid back. With REAL money. Money you took. Now have to pay back. All you have done is wasted a $200k loss carryforward for what? | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| Yes, I posed the question because I didn't have the foogiest idea. I am a quick learner, though. My client will have excess cash in his business. He will not take out a loan. The plan is that he will form an s-corp, pay himself a $200k distribution from the excess cash, which from what I understand from you guys, will be considered a capital gain distribution to the extent it exceeds his basis (including basis in stock issued to form s-corp) which he can offset with his $200k capital loss carryover. Am I correct? Doesn't seem right. Seems he should only be allowed the $3,000. | |
| 19 September 2007 | |
| so I DID answer it when I wrote that distributions in excess of basis ARE capital gains. | |
| 19 September 2007 | |
| Hi JR we all understand the rules I would like people to apply them to the question without changing the facts and confusing the person asking the question who has what is a simple question. bye | |
| 19 September 2007 | |
| yes distributions in excess of basis is a capital gain. does this guy have a capital gain yes or no. Ask a question if you dont understand her facts or would like a clarification. bye | |
| 19 September 2007 | |
| This discussion forum is for DISCUSSIONS not just answers. | |
| 19 September 2007 | |
| So Martha, you will have to figure out what his S corp basis is before you can determine whether any of the distribution is taxable gain or not. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| There has not been a reasonable answer as to WHY someone would want to manufacture a $200k capital gain. The only thing I can think of is to do this would be to shut down teh S after the vendors have been repaid from the money you put in and take the $100k deduction. Then you only have 33 years of the $3000 loss carryforward.
Seems pretty stupid to go thru all of this. | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| For sake of argument, let's say, yes; in the amount of $200k. My question is does he get to use his entire $200k capital LOSS CARRYOVER to offset the $200k capital gain distribution or is he subject to only using the standard $3,000 capital loss? Please answer those that can. | |
| 19 September 2007 | |
| You still have to know where the excess cash came from to answer the question. | |
| 19 September 2007 | |
| Martha, what is his basis at the end of the year in the S corp? (actually need to know basis before subtracting the distribution) | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| You can offset the $200k loss carryforward with a current year $200k capital gain.
That is not the question. The real question is do you have a $200k capital gain. | |
| 19 September 2007 | |
| Martha answer this. How did the 200K get into his new corp? Where did the money come from a contribution to capital? Now i am late but this is so riveting I am hanging in. bye | |
| 19 September 2007 | |
| The last 4 posts are all related and get to the crux of the question. | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| Sales | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| So we go back to square one: excess cash had to come from somewhere. If it came from profit and was not distributed, he is only paying himself his earnings. If he put the money in to begin with, it is part of his basis. Only if the corporation borrowed the money from a third party and the liability was on the books would this be an excess distribution. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| You need to be more specific Martha. Or you can take the Don Farmer approach. You can deduct whatever you want as long as you are willing to pay the penalties and interest and do the jail time.
I like Don. He is one of my all time favorite tax gurus. | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| I don't know what his basis is. He has not formed the s-corp. Whether he does form it or not is dependent on whether he can use up his $200k capital loss carryover. Any thoughts? | |
| 19 September 2007 | |
| Wes, don't change the facts, now. The corp hasn't even been formed. | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| What is the tax consequence if he paid himself his earnings, Death&Taxes? | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| I am starting to think Martha is really Kevin and posted this topic just to mess with us.
The only way this will work is if you BORROW money (suppliers or bank) and pay it to yourself as a distribution. This would create the capital gain you are looking for. The question is, WHY would you want to do this? | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| Martha, if you are asking "What is the tax consequence if he paid himself his earnings?", perhaps you are qualified to pull this off.
still don't know WHY you would want to do this. | |
| 19 September 2007 | |
| Martha, no problem in asking such a question, but you do need to take some CPE in S corp taxation if you have any clients thinking about S corps.
The profit from the S corp is ordinary income, whether he takes it out or not. | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| Thanks, all. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| I think its funny how Kevin keeps talking to himself..... | |
Martha Brown (talk|edits) said: | 19 September 2007 |
| I know the it's ordinary income taxable to the shareholder. What I was asking was what was the tax consequence, if any, of paying it to yourself. That's all. Where did these smart alecs come from? | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| Is he related to Beetle Juice?
BTW, I was in your neck of the woods a few weeks ago. Went to Pidgeon Forge and went white water rafting (first time) at NOC. Had a good time despite the inlaws. | |
| 19 September 2007 | |
| Oh I love NOC - did you raft the Nantahala? How cold was the water? | |
| 19 September 2007 | |
| Beatle Fred at his best: Discussion:* House Buyout *
(I was just kidding when I wrote that I had alter-egos - those people are real.) | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| Yep. 40 degrees coming out of the dam merging into 60 degree water. It hurt it was so cold. | |
| September 19, 2007 | |
| Bush, because you can then increase your basis in the S with NO tax cost, since the carryover losses eat the gain. I've never seen folks get so carried away on something so simple. No one's creating much of anything. No, Martha, again, his usual distribitions/profits have NO affect on the loss. We're not changing that answer. But if and when there comes the time when he's taken excess distributions, which is fairly easy to do, contrary to some posters' experiences...then he could go ahead and have that taxed as cap gains, and offset whatever gain there is. No limit on the 3000. That 3000 is the NET loss he can take per year. Nuttin' to do with this. When he has that gain taxed, even tho' it's free, it's a basis increase. | |
| 19 September 2007 | |
| The point is basically that a distribution in excess of basis will technically allow the capital loss to be "used", but you close the Corp and it's right back there. | |
Bushmaster (talk|edits) said: | 19 September 2007 |
| Exactly Dennis. So what is the point of generating a fake $200k gain to eliminate a real $200k loss carryforward. | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| JR: I am not missing that excess distributions are capital gains; I just can't see the sense of forming a S corporation simply to use up gains with from the description here appears to be excess cash this guy has laying around.....now if he is pulling it out of a mattress, or made it in some way that will not survive examination, that is something else but I doubt Martha wants to represent that kind of person.
I represented a stockbroker with hugh losses who tried to remove his self-earned commissions from trading his account from his W-2 to reduce the loss. I told him he was wasting his money on my fee, but I had to deal with it since it was my boss' idea. Never had a chance; there were even cases on semi-point. Odd thing was two years later he made huge gains and wiped out the losses. | |
| September 19, 2007 | |
| Oh, yeah, I agree DT. This just serves as an example of a way to use up some cap losses that may be out there that we're not thinking about when our S/H's get upside down on their money. No way that it makes sense for this guy unless he's going to run a real business out of it. | |
| 19 September 2007 | |
| Not even then, JR. The imbalance between basis and Corp assets may eventually zero out, but $3K a year will do it with annual tax savings. | |
| 19 September 2007 | |
| <Suppliers HAVE to be paid back. With REAL money.>
Says who? The supplier? This scheme only works IF the S Corp owner intends to stiff the suppliers and make himself scarce afterwards. And that may in fact be part of the plan. | |
| 19 September 2007 | |
| why not pay the suppliers with NEXT YEAR's sales???? That's real money. | |
| September 19, 2007 | |
| Again, real world, folks, you pay the bills with next year's income. As long as the company grows, as is usually the case, you can take excess distributions for years, keep paying bills, etc. JUST LIKE THE US GOV'T, which was my point.
Is this a record for a one day thread? Or did Beatlefred beat this? | |
Death&Taxes (talk|edits) said: | 19 September 2007 |
| You know builders have worked that way for years! Buy some land, start a project, get a construction loan, siphon off enough of the loan to live like a prince and when construction is 60-70% complete and the money is running out, start another project and borrow, using the funds to finish the first job first. This works well as long as interest is cheap and the economy does not go into the tank. | |
| 20 September 2007 | |
| Hi this is what happens when those of us think "outside" the box and the person asking the question isnt even "inside" the box. No offense to Martha but Kevin is right she needs to take some classes to just get in the box. my final thought promise. bye | |
| 20 September 2007 | |
| Based on her profile, most of us assumed she had had some S corp experience. This is a good example of when to not assume anything based on someone's profile.
I am way too guilty of making assumptions in an initial post. | |
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