S Corp losses

[jprince1]

My S Corp will lose money for the fourth straight year. I did make a profit in 2018. So this will be four out of the last 5 years I have lost. My Corp is just about bust due to pandemic and economic conditions.  The corp has no debt. I run it on a cash basis. Can I still claim my losses on my 1040 ? Will the IRS say it’s a hobby now ? I most likely going to close the business in 2023. 

[tagteam · Accepted solution]

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@jprince1 wrote:

Can I still claim my losses on my 1040 ? 

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You can use losses that are not in excess of your basis in the corporation.

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@jprince1 wrote:

Will the IRS say it’s a hobby now ? 

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The factors the IRS uses to determine whether you are operating with an actual profit motive are set forth in Treas. Reg. §1.183-2(b):

1. the manner in which the taxpayer carried on the activity,
2. the expertise of the taxpayer or his or her advisers,
3. the time and effort expended by the taxpayer in carrying on the activity,
4. the expectation that the assets used in the activity may appreciate in value,
5. the success of the taxpayer in carrying on other similar or dissimilar activities,
6. the taxpayer’s history of income or loss with respect to the activity,
7. the amount of occasional profits, if any, which are earned,
8. the financial status of the taxpayer, and
9. elements of personal pleasure or recreation

See https://www.law.cornell.edu/cfr/text/26/1.183-2

[jprince1]

Srry little confused. Been in business for about 15 years. Is basis the original stock buy I did to bootstrap the company 

[tagteam]

You start with your initial investment in the corporation but then you need to adjust that each year according to the parameters set forth in the IRS topic at the link below.

See https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-stock-and-debt-basis

[jprince1]

Wouldn’t that be in my K-1 that turbo tax calculates for me 

[tagteam]

Yes - for each year the corporation has been in existence.

[Mike9241]

maybe not.  what isn't reported on the k-1 is your initial and subsequent investments. 

in theory (because bookkeeping is not always correct) your tax basis at the end of the year should be the same as schedule L, column D, lines 19 + the net of lines 22 through 26

[tagteam]

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@Mike9241 wrote:

....your tax basis at the end of the year should be the same as schedule L, column D, lines 19 + the net of lines 22 through 26

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....and we do not whether a balance sheet was required or, if so, whether it was prepared.

[jprince1]

No balance sheet. However I just realized i file jointly with my wife on my 1040 and even with any loss we would not surpass our standard deduction of 25,000 so any loss would not really matter am I correct about that ? 

[Mike9241]

you are not correct. s-corp losses are deducted in arriving at adjusted gross income (form 1040 line 11).  the standard deduction is a deduction to reduce adjusted gross income to taxable income (form 1040 line 15).   in other words, these are two separate deductions, you get both (but see below).  don't know what you've done in prior years but the S-corp files a tax return and reports the profit or loss to the shareholders on the 1120-S k-1. this is entered in your 1040 and the profit/loss should appear on schedule E page 2 and carry to schedule 1 line 5

starting with 2021 you were supposed to include form 7203 with your 1040 to report your tax basis when you report an S-Corp loss.  those losses are only deductible to the extent you have tax basis. evidently, some enough taxpayers didn't follow this rule so the IRS wants to check this. the 7203 in Turbotax didn't work last year to limit losses to tax basis and doesn't seem to be working in 2022.  the only way to limit losses if there's a lack of basis was to complete form 6198.

if the corp has no tax basis in property and equipment and no credit card debt, your basis on 1/1/2022 would likely be the cask at the end of 2021. 

[tagteam]

@jprince1 

You are going to have to look at your past K-1s or (as Mike stated) page 2 of your prior Schedules E.

[jprince1]

I have filled out all my k-1’d. I used turbo tax business. Business has lost money four out of the 5 last years including three in a row , not counting 2022 of course. All my returns have been accepted by the IRS. I pay rent for my home office around 5000.00 a year so my losses were deducted from that additional income 

[tagteam]

Again, you need to calculate your basis in the corporation. 

See https://www.thetaxadviser.com/issues/2022/feb/s-corporation-shareholder-recomputation-basis.html

Your losses serve to reduce your basis and, with respect to your initial question, you cannot deduct a loss in excess of your basis on your 1040.

[tagteam]

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@jprince1 wrote:

I pay rent for my home office around 5000.00 a year so my losses were deducted from that additional income 

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That is simply not the way it works and you may need to consult with a local tax professional.

https://taxexperts.naea.org/listing/service/corporations