If you operate a business as an S corp, you may be able to claim a valuable tax loss against your other income. But the tax law generally limits such losses to the amount of your basis in the stock, plus any outstanding loans made directly from you to the corporation.
Strategy: Arrange a capital contribution or loan to the S corp. You’ll increase your adjusted basis and give yourself “breathing room” to absorb losses passed through by the corporation to you.
This depends in part on your personal liquidity, but it could be a beneficial midyear tax move.
Here’s the whole story: As an S corp owner, you’re probably well aware that all of the items of income and expenses of the company are passed through to the shareholders. You’re responsible for reporting the appropriate share of income and deduction items on your personal tax return.
Depending on the situation, your corporation might benefit from a fresh influx of capital. To determine how much of a capital contribution or loan to make to the S corp, take a quick look at where you stand. The middle of the year is usually a good time to do this.
Key point: The money must come out of your own pocket. For instance, you can’t jigger your losses by arranging a loan to the S corporation from a third party. The IRS and the courts have consistently denied losses for third-party loans.
On the flip side, a tax loss might be more valuable to you in the future if you expect this to be a low tax year. Any nondeductible loss may be carried forward indefinitely until you have sufficient basis to absorb it.
Tip: Thus, you might hold off making a capital contribution or loan if you don’t need the tax loss this year. Keep the money for as long you can.