S Corporatio​n Shareholde​r Vs. Partner Partnershi​p Basis

		Stephan Brewer, CPA, CTRS President at www.hesthetaxman.com
	After reviewing a new client's, S Corporation Shareholder basis, and in light of the recent tax court case (Montgomery, T.C. 2013-151), I need to point out the major difference between how basis is calculated for an S Corporation vs. a Partnership. Why is this critical? Your basis in the shares of your S Corporation, or interest in the partnership, is what allows you to take losses on your personal return. When you run out of basis, your losses have to be suspended (it cannot be taken on your personal return). You can see why this would be critical if your entity has reported losses. Obviously you would like to take full advantage of these losses on your personal return. Unfortunately, this has been a trap for many uneducated S Corporation shareholders. I am often surprised when tax professionals seem uninformed or fail to guide their clients on this matter. The following is the major distinction: A loan to an S Corporation gives rise to debt basis of that shareholder ONLY if the loan is made directly by that shareholder or if that shareholder actually advances the funds to pay that specific debt. Two Key Points: 1. The shareholder must loan the funds DIRECTLY. Funds from another entity controlled or wholly owned will NOT meet the requirements. 2. The shareholder must have made an Actual Economic Outlay. Therefore, instead of having an S Corporation borrow from the bank with a guarantee from the shareholder, the shareholder should borrow the money and loan the funds to the S Corporation personally. This is a simplified example of an area of tax law that is anything but simple. Hope this helps you. Stephan H. Brewer, CPA, CTRS www.HesTheTaxMan.com www.facebook.com/HesTheTaxMan