We had a reader ask the following question:
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.