S Corp Yearly Loss and Carryover

[luckyaces09]

Hello,

I was hoping to get some guidance to ensure I am filing correctly. I am a single member S Corp and for 2023, I am showing a loss in item F. For the sake of this discussion let's call it $5k.

For 2024, I anticipate profits, let's call it $100k. 

1. Am I correct to assume the $5k loss from 2023 can be carried over to 2024 making the total assets $95k?

2. My 2023 K-1 is showing a loss in item 1 for ordinary business income. I am reading that item cannot be negative, can anyone confirm? I am also taking a salary.. how would that factor into my personal taxes?

Thank you!

[tagteam]

First, S corporations do not carry forward losses from one tax year to the next tax year; net business profits (income) and net business losses are passed through to the shareholder(s) on Line 1 of K-1 (1120-S) each tax year.

Second, are you saying that your assets are showing as a negative number on Item F of your 1120-S? 

Next, your salary would be a deduction for the corporation on your 1120-S and reportable on your 1040 (personal tax return) as W-2 income. 

Finally, your S corporation can pass a net loss through to you, as a shareholder, on Line 1 of your K-1 but you need to have basis in the corporation in order to recognize that loss on your personal income tax return.

I am also going to page Champ @Rick19744 for further input.

[luckyaces09]

Yes, I am showing a negative number on Item F of the 1120-S as my total income was less than my deductions. Is that allowed?

I am the only shareholder in my S Corp and own 100% of the corporation. Are you saying that if I have a negative k-1 I will be able to deduct that from my w-2 income that I paid to myself. 

Thank you!

[Mike9241]

Yes, I am showing a negative number on Item F of the 1120-S as my total income was less than my deductions. Is that allowed?

I am the only shareholder in my S Corp and own 100% of the corporation. Are you saying that if I have a negative k-1 I will be able to deduct that from my w-2 income that I paid to myself

we can't see your return but are you saying that item F on Page 1 of the 1120S is negative? That usually only occurs when there's a cash overdraft. however, putting shareholder loans that you made to the corporation on line 7 of schedule L rather than where they belong which is on line 19 can also produce that result.

since you have a loss when you do your 1040 you'll need to complete form 7203 to justify to the IRS that you have basis to take the losses. if not the losses to the extent they exceed your tax basis will not be deductible. you don't lose them. They carry forward until either there's sufficient profit or you otherwise increase your basis in the corp.  Be wary and seek professional advice if you repay reduced basis loans.  the tax trap is that you will generate taxable income 

[Rick19744]

A few comments on this issue:

• Based on the limited facts, a negative number in box F essentially means you are potentially insolvent.
• This tells me that you also could be thinly capitalized or have potentially misclassified something as noted by @Mike9241 
• As noted by @tagteam the S corporation losses will be passed out to you as the shareholder; nothing is carried over at the entity level.
• As a shareholder in an S corporation you need to be tracking your basis in this investment.  This is what form 7203 is for and must be filed with your return.
• Form 7203, when completed correctly, will tell you whether or not your S corporation loss is deductible on your personal tax return.
• Schedule K-1 line 1 can be either positive or negative, and is negative when losses are incurred at the entity level.  Note the actual schedule K-1 which reflects (loss) directly on the form.
• From the facts, I can't tell how long you have been in business, but it sounds like a meeting with a tax professional would be in your best interest to provide you with a better understanding of how the S corporation tax works and is reported.

[luckyaces09]

Thank you for all of this- it is very helpful.

Just to be clear, ordinary business loss from the corporation can show up and produce a negative K-1, which can be used to offset W-2 income paid by the corporation to the same singular shareholder if the corporate loss is less than W-2 income?

This is for a newly formed corporation 

[tagteam]

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@luckyaces09 wrote:

Just to be clear, ordinary business loss from the corporation can show up and produce a negative K-1, which can be used to offset W-2 income paid by the corporation to the same singular shareholder if the corporate loss is less than W-2 income?

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Yes, and @Rick19744 and @Mike9241 will confirm (I believe) that you need to have sufficient basis in order to recognize the loss (hence, the reference to Form 7203 in their posts).

[Mike9241]

@luckyaces09        NO NO NO if the k-1 is showing a loss you must have tax basis for the loss the be allowed. your wages have nothing to do with your tax basis. your wages can be fully taxable but none of your k-1 loss may b deuctible. Consult a tax pro, we can see your return and a negative number in box F gives us pause as to what your basis is

over simplified example

revenue    $100

salary           $60

other expenses $50

k-1 loss $10

balance sheet cash overdraft $10

retained earnings deficit of $10

M-1 lines 1 and 8 show a loss of $10

M-2 column a line 4 and 8 Could also show a negative $10

in this case the wages are fully taxable but without tax basis the loss is not deductible

[Rick19744]

Just to summarize the issue:

• As noted, your W-2 wages and the K-1 are completely separate
• As noted, you can have W-2 wages being reported and taxed while still showing a loss on the K-1
  • If the K-1 reflects a loss, you need to complete form 7203 which will then determine if the loss can be utilized on your personal tax return; ie: you have tax basis to take the loss
  • If the form 7203 determines the loss cannot be utilized, meaning you do not have tax basis, then the loss will be carried forward at the personal return level.
• Based on the questions, you will definitely benefit from a consultation with a tax professional.  Don't be penny wise and pound foolish here.  Incorrect tax returns, potential penalties, and IRS scrutiny can be way more painful than the investment in a short consult with a tax professional.

[luckyaces09]

As I have no desire to take the loss on my personal return, can I just carry over the loss on my corporate return to the next year and offset corporate gains?

[tagteam]

No. S corporation net profits and losses are pass through to the shareholders each tax year.