Tax Lawyer's Blog

Because of the prolonged recession we expect to see many businesses report losses from their 2009 operations. Losses from S Corporations are deductible on a taxpayer’s Form 1040 only to the extent of the shareholder’s stock plus debt basis.

Tax preparers should maintain the following two worksheets (courtesy Small Business Taxes and Management) for each of their S Corporation shareholder clients:

Worksheet 1

S Corporation Shareholder Stock Basis Worksheet 

Stock basis at start of year                                 _________
Excess deductions/losses from prior years                    _________
   Net                                                       _________

Plus--Increases:

Ordinary business income                                     _________
Net income from rental activities                            _________
Interest income                                              _________
Dividend income                                              _________
Royalty income                                               _________
Net short-term capital gain                                  _________
Net long-term capital gain                                   _________
Net gain under Section 1231                                  _________
Tax-exempt interest income                                   _________
Other income                                                 _________
Section 179 recapture on disposition of assets               _________
Depletion (but not oil and gas) in excess of basis           _________
Life insurance proceeds                                      _________
Other increases                                              _________

Contributions to capital                                     _________

Less--Decreases:

Ordinary loss                                                _________
50% of meals and entertainment (1)                           _________
Section 179 expense deduction                                _________
Charitable contributions                                     _________
Deductions related to interest, dividends, etc.              _________
Interest expense on investment debt                          _________
Other nondeductible expenses (2)                             _________
Net loss from rental activities                              _________
Net short-term capital loss                                  _________
Net long-term capital loss                                   _________
Net loss under Section 1231                                  _________
Foreign taxes                                                _________
Oil and gas depletion                                        _________
Other decreases                                              _________

Distributions (not in excess of stock basis) (3)             _________

     Basis                                                   _________

Notes:

(1) The 50% of meals and entertainment expenses that are not deductible still reduce your basis.
(2) Other nondeductible expenses can include fines and penalties.
(3) Distributions can include actual cash or property payments to shareholders or the payment of a shareholder’s personal expenses.

 Worksheet 2

S Corporation Shareholder Debt Basis Worksheet  

Debt basis at start of year                                  _________

Plus:

Loans made during the year                                   _________

Less:

Loan repayments                                              _________
Excess losses/deductions from prior years                    _________
Losses/deductions in excess of stock basis                   _________
Distributions (not in excess of debt basis)                  _________

     Basis in debt                                           _________

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