S-corp loss

[Max W]

Client is 50% owner of an S-corp that has been losing money for several years.  In 2020 basis went to zero and there was a $64K loss that was supposed to be carried forward, but is being taxed as other income.  

For 2021 client expects he will have about $50K ordinary income. 

By amending 2020 and using form 6198 At Risk Limitations, the loss can be carried forward to 2021.

How will this affect the taxablity of a 2021 distribution?  

Doesn't the $50K raise the basis to $50K, but distributing all of it leaves the basis at zero, with the same loss CFWD as before?

 

 

[Lee B]

21 minutes ago, Max W said:

Client is 50% owner of an S-corp that has been losing money for several years.  In 2020 basis went to zero and there was a $64K loss that was supposed to be carried forward, but is being taxed as other income.  

 

 

 

There were only 2 legitimate possibilities here, if the owners received distributions in excess of basis, capital gain could be triggered,

otherwise the 64k is a suspended loss.  How did it ever end being reported as other income?

[jklcpa]

3 hours ago, cbslee said:

How did it ever end being reported as other income?

 

It is possible to have nondividend distributions taxed as ordinary income if the S corp also has debt basis that had been reduced by losses and not restored to its full value before the distribution takes place. 

Max W didn't give us enough information to determine if this is what happened or if 2020 was handled properly. 

 

[Max W]

On 11/4/2021 at 12:41 PM, cbslee said:

There were only 2 legitimate possibilities here, if the owners received distributions in excess of basis, capital gain could be triggered,

otherwise the 64k is a suspended loss.  How did it ever end being reported as other income?

Other income was a mistake.  This wasn't handled properly.

There is no debt basis.

Question:  If the $64K carried fwd, wouldn't the client be faced with the same issues as now if the $50K is completely distributed?   The $50K is added to basis but when it is distributed, doesn't that reduce the basis by the same amount, leaving the same $64K to be carried forward.

Wouldn't it be better to take the loss as a cap gain and leave the basis with a clean slate?

 

 

[Lee B]

I have had clients with suspended losses before, however the situation was resolved with profits in future years which I had expected.

[Abby Normal]

I've never needed a 6198 form for a basis restricted S corp loss carryover. If the 1040 was done wrong, just amend it and use the Basis form to carryover the loss.