Beware Your S Corporation Tax Basis!

Published on: 08:20AM Dec 29, 2010

Roth and Company out of Des Moines, Iowa has a great Tax Update Blog that Joe Kristan writes on daily.  I try to touch base with his blog each day and he has been running some year-end tax tips that I thought I would pass on to you.

For today, I want to remind our farmers that if they have an S corporation, and they anticipate a loss for the year, it is very important to make sure the farmer has enough "basis" to absorb the loss.

Basis is equal to the amount of cash or property contributed to the corporation plus any income less losses and distributions.  The farmer is also allowed to have basis for the loans made directly to the corporation.  Simply guaranteeing a loan gives you NO basis in the S corporation.

With the new 100% bonus depreciation rules in place, you may find that this deduction will create a loss in your S corporation with no basis available to pass that loss onto your personal return.  However, in some cases, you may want to limit the amount of loss passing through to you this year to take advantage of the 15% tax bracket, etc.  So, in both cases, it is extremely important to know your S corporation tax basis before year end.  Here are some ways to increase your basis:

Contribute cash or capital to the corporation - Contributing cash increases the basis in an S corporation.  Another option is to contribute other assets such as equipment, etc. to the corporation.  This will increase the basis by the amount of the tax basis in that asset.

Loan money from personal funds to the corporation - These loans should be documented with a promissory note and there is a catch if the loans are paid back before the corporation earns back the losses.  In that case, the repayment will trigger taxable income to the farmer.

Borrow money from a third-party and loan it to the corporation -  These can be effective if borrowed from unrelated third parties.  If you borrow from a related party, this can be disastrous to your planning.

If you have multiple S corporations, be careful in loaning any money between these corporations to create basis.  In all cases, review this with your tax advisor before year-end so you know if you can deduct it and if not, what you need to do to deduct it.