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S corp losses: year-end tax strategy

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in Small Business Tax

If you own an S corporation, the company’s gains are your gains, and its losses are your losses. All items of income and expense are passed through to the S corp shareholders such as yourself. However, the amount you can claim as a loss on your return is limited to your basis in the stock, plus any outstanding loans that you’ve made to the corporation.

Strategy: Make a capital contribution or a loan to the S corp. This will increase your basis so that it will be easier to deduct a loss on your 2009 returns.

Assess your situation right now to determine the exact amount of the economic outlay you’ll need before Jan. 1.

In order to boost your basis, however, the money must come out of your own pocket. For instance, you can’t jigger your tax losses by arranging a loan from another party. The IRS and the courts have consistently denied loss deductions for third-party loans.

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