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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

A Guarantee is not S Corporation Basis!

Mar 04, 2011

 We had a reader ask the following question:

 "My farm operation is held in an LLC with S-Corp tax election. Last year I took a loan from the bank to purchase livestock and equipment.
I had to sign personal surety for the loan. Should the LLC default on payment, I stand to lose everything (You know the standard bank loan agreement).
 Because I signed personal surety for the loan and stand to lose everything on default, can I add the loan value to my LLC’s bases to offset tax losses?"


A farmer who owns a S corporation can only deduct losses to the extent of basis in the corporation.  Basis is primarily related to the amount of money the farmer puts into the corporation plus the earnings less the losses and the money the farmer takes out of the corporation.  However, the farmer can also have basis in any loans that they make "directly" to the corporation.

As in the above question, many farmers think that simply guaranteeing the loan that the corporation gets from a bank will create basis in the corporation.  This is wrong.  The loan must be made directly by the farmer to the corporation.  In this case, if the farmer had borrowed the money from the bank and then made a loan to the corporation with the necessary documentation of the loan, then they would have basis.

But simply guaranteeing a loan does not create basis.




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