Discussion:S Corp SH Loan Question
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Discussion Forum Index --> Tax Questions --> S Corp SH Loan Question
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| I have a new client who sold their S corp in 2007. After making all of the accounting entries to close the books, they have a remaining balance of $50,000 in Loan from Shareholder (no cash left to pay themselves back). Is there any way they can deduct this? Thanks! | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| I would guess the offset is a deficit in retained earnings.
Run up the basis calculation on the basis of the loan. Most tax programs now have such a worksheet. My guess is no because they have used up the basis in deducting losses, however you never know until you the computation. If they have basis it should be at least a nonbusiness bad debt. | |
| 4 February 2008 | |
| The $50,000 was probably used as deductions to finance the S Corp losses. The shareholder already received some tax benefits by claiming the loss from the K-1 form. You can not deduct this amount twice. | |
Scollinscpa (talk|edits) said: | 4 February 2008 |
| Thank you for your responses. As RoyDaleOne suggested, I calculated out their stock basis and loan basis. At the end of 2007, they have a stock basis of -$206 and a loan basis of $54,705. So, am I understanding you correctly that if they have no stock basis, they cannot do anything with the remaining loan basis? | |
Phil Moody (talk|edits) said: | 4 February 2008 |
| Maybe I am missing something, but if they "sold their Scorp", why are you closing the books? The Scorp lives on.
Are you saying they sold all the assets of the Scorp, and now, your liquidating the Scorp? | |
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| Yes, they are liquidating the S corp as well. I'm I correct that there is nothing they can do with the loss? | |
| 4 February 2008 | |
| someone did something wrong along the way if they have a NEGATIVE stock basis and a POSITIVE loan basis.
stock basis cannot go below zero I would suggest taking a good course in S corp taxation if you are starting to have any clients using this business entity form. The investment in education will pay off. (these kind of questions always seem to make it to the Special Enrollment Examination for prospective EAs). | |
| February 4, 2008 | |
| Tho' it might be a bit late on this one. I agree, I saw the little - there earlier and thought, oh, surely not...and left. If the numbers are as you say, then you best brush up your speech to the client on cap gains. | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| If the numbers are as you say look to a nonbusiness bad debt. | |
| February 4, 2008 | |
| No, no Roy Dale, whoever you are...they owe the company!It'll go the other way. Big income to them to clear the upside down debt. | |
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| Thank you all very much. I have already signed up for a class on S corp basis calculation. I only wish it was today!
After much cleanup, here is what there B/S looks like right now: Cash $24,000 (Total Assets) SH Loan $54,000 (Total Liabilities) Capital Stock $10,000 Retained Earnings -$40,000 (Total Equity) The client will take the remaining cash out of the corp as a payment to the Loan from SH, leaving only $30,000 SH loan, $10,000 Capital Stock, and $-40,000 Retained Earnings. Is there anything else I need to do?
Total Liabilities and Equity $24,000 | |
| 4 February 2008 | |
| yes, you need to calculate the basis in the loan and basis in the stock correctly to determine the handling on the 1040 | |
| 4 February 2008 | |
| a quick guess would be nothing more to do - the shareholder has already recieved the tax benefit, as RoyDale already pointed out. This might be different if the shareholder had inherited his stock, for example. | |
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| JR1,
I'm confused, why would the loss the SH sustained as a result of the S Corp not repaying the loan be income to the SH? | |
| 4 February 2008 | |
| let me correct that - it looks like a $10,000 CG on the loan, and a $10,000 loss on the stock. | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| Sorry JR1 shareholder loan stated as loan from shareholder. Now liabilities are SH Loan 54,000.
Yes, I am named by my mother after the famous couple.... | |
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| Kevinh5 - I have no idea if the loan was written or not. What would you do if it wasn't? | |
| February 4, 2008 | |
| Well, then I'm confused. You can't have negative basis. If you do, then they got more tax losses than they were entitled to and it's settle up time. Not saddle up time. | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| Well, based on the numbers you give and assuming (yes we all know what that means) the retained earnings all reduce the basis in the stock and shareholder loan, there is no loss on the shareholder loan.
54000 - (10000 - 40000) = 24000 the amount of the cash. | |
| 4 February 2008 | |
| oh heck, I'm going to have to look this stuff up, I think I'm wrong | |
| 4 February 2008 | |
| losses affect stock basis first, then loan basis
gains increase loan basis first, then stock basis distributions exceeding stock basis are taxed as capital gains, and do not reduce loan basis | |
Ljcollinscpa (talk|edits) said: | 4 February 2008 |
| OK, I understand the rules. So, what does that mean in my case? | |
