I thought I had responded previously. TURBOTAX PROGRAMMERS TAKE NOTE THE 7203 DOES NOT WORK TO LIMIT LOSSES TO BASIS. THIS REALLY SUCKS BECAUSE I CAN'T IMAGINE HOW MANY TAXPAYERS HAVE NOW FILED WITH INCORRECT RETURNS. HOPE INTUIT IS GOING TO FESS UP THAT IT SCREWED UP AND PAY TAXPAYER PENALTIES THAT RESULT.
there are actually three concepts that need to be dealt with to limit losses. One is at-risk - form 6198. Another is tax basis - form7203. Finally, there is the passive loss limitation - form 8582. since the 7203 doesn't work but is required you must fill it out. you must also fill out form 6198. the tax laws say your deductible losses, before taking into account any passive loss limits, are limited to the lesser of your tax basis or the amount at-risk, for most S-Corp shareholders their tax basis is the same as the at-risk amount at the beginning of the year. once the allowable loss is computed under either of these two concepts the the PAL rules come into play
some examples.
1) you borrow $100 from a bank. you personally guarantee the loan and put the money into the S-corp
result your at-risk amount increases by $100, your basis increases by zero
2) same as above but you borrow from the bank in your name and then you put the money in the S-Corp
result your at-risk and tax basis increase by $100
3) you borrow $100 from a bank on a nonrecourse basis pledging the S-Corp assets. you loan the $100 to the S-Corp
result your at-risk goes up zero your basis goes up $100
these are complicated concepts because of all the rules, court decisiona and IRS pronouncements that must be considered.
