I have a client with zero tax basis. They have accumulated $45K in losses that can't be deducted due to the zero basis. Can they carry these forward upon sale of the S Corp to offset the capital gains realized? I'm fairly sure this is a no, but am not finding the best guidance.

yes, also,I guess it depends;as you know, an S corp shareholders have both a stock and debt basis. Stock basis represents the amount of capital investment the owner/ee has in the company, plus flow-through income and less losses. Debt basis represents any amounts the owner/ee loans to the entity in expectation of repayment at a later date. Repayments decrease debt basis. So, the amount of recognizable losses is limited to the total of a shareholder's stock and debt basis. The at-risk rule states that an S corp owner/ee may not deduct more than you are at risk for losing in the investment or business in any given tax year. Therefore, you with $150k of capital basis in an S corp may not deduct more than $150k in losses in one tax year. you may carry forward losses for use in future years indefinitely. Passive losses can only offset passive income, whereas active losses offset active income. To determine whether a loss is passive or active, you must examine your participation in the activity. If you are simply an investor and lacks any performing or oversight role in the organization, yiou are a passive investor. If you are an active participant, then the losses that result are active losses. If there are losses that exceed his basis in the corporation, you may deduct them against the same type of income.

note;so, you can only deduct losses of the S-Corp against ordinary income to the extent you have basis in the S-Corp. Anything above that is considered a capital loss. It's probably long-term capital loss so it's subject to the $3k per year limit with any amount you can't deduct this year carried forward to future years.

If you do that and get a negative number for AGI, then you could have a "Net Operating Loss".
you need to determine if you want to carry back the NOL to the prior 2 years or only to future years, 20 years. Base this decision on what you anticipate your tax to be in the future years compared to the rates in the prior years.


Deduct the NOL in the carry back years if it is to your tax advantage to do so. If the NOL is not completely absorbed in the prior years, carry over the unused NOL to future years. Alternatively, if you foresee being in a higher tax bracket in the subsequent year, you could elect to carry the entire NOL forward.in the future, if no sufficient gain, then you can;t deduct the remaining nol

They are selling the entity 1/1/14. He has no debt basis, and his stock basis has been reduced to zero. I don't think it's been in existance for that long, at least they have been suffering losses for more than 2 years, so the carryback option won't work. I'm stuck with trying to minimize the capital gain realized on the sale.

I'm assuming the capital loss carryback/forward is still 3 back, 5 forward. So I can use the full NOL since it exceeds tax basis to offset the capital gain on sale?

#1;Ok then you are correct;then, no c/b option is available.

#2;As you can see, the purpose of a net NOL carryback is to offset net income taxed on the entity's tax return in a previous year. Because a Sub-chapter S corp passes net income, net losses, capital gains and capital losses through to the shareholders each year, no previous year taxable net income exists to offset at the corp level. However, a shareholder/owner might be able to use a NOL carryback on his personal income tax return; A shareholder's percentage of the S corp's NOL for the year is reported to the shareholder on line 1 of Sch K-1. This loss is reported on the shareholder's personal tax return on line 17. If this loss results in a loss on line 43 (Taxable income) you MAY have a NOL. To take advantage of a net operating loss carryback, shareholder must attach a statement to his personal tax return stating he is electing to carryback the NOL. This is an irrevocable election; once it is made and the tax return is filed,he cannot change his mind after the current year's tax filing deadline. If he doesn't file this statement with the tax return, he is automatically electing to carry the loss forward into future years. This is also an irrevocable election. In most tax years, a NOL can be carried back 2 years to offset taxable income in those years. He may apply the NOL to the older of the two years first. If any NOL amount remains after offsetting the taxable net income in the older year, he may carry the remaining NOL into the more recent year. If any NOL still remains, it will be carried forward into future years.Applying NOL carrybacks requires filing amended tax returns for each year to which the NOL carryback is applied . So as saild above, assume that the Sc orp shareholder carries NOL, then, Alternatively, if he foresees being in a higher tax bracket in the subsequent year, he could elect to carry the entire NOL forward.in the future, if no sufficient gain, then, he can’t deduct the remaining NOL.

LTCL for corps;Subchapter C Corp can deduct capital losses only up to the amount of capital gains. If capital losses exceed capital gains, the excess is first carried back three years prior to the loss year and used to offset capital gains. Then, any unused loss is carried forward up to five years from the loss year to offset capital gains in those years. If the corporation is dissolved, the loss is not carried to any other year or return, it is simply lost. A corp may not carry a capital loss from or to a year in which it operates as a Subchapter S Corp. Rules for Carryback and Carryforward When carrying a capital loss from one year to another, the following rules apply: When figuring the current year capital loss, you cannot combine it with a capital loss carried another year. In other words, you can carry capital losses only to years that would otherwise have a net capital gain. All income and losses flow through an S corp to the shareholders. Each shareholder then reports his portion on his individual tax return. The losses a shareholder recognizes are directly proportional to the amount of stock basis he has in the organization. If he owns 40 percent of the stock of the company, then he recognizes 40 percent of the capital losses. If he owns 40 percent of the company and the company reports losses of $75K in the following year, his stock basis will decrease by $30K.

I understand what you are saying....let's simplify it though, because I'm still amiss on the point.

Assume, 0 stock basis. Suspended losses of $45K, plus whatever loss is incurred in 2013. Presumably, the capital gain on sale would be sale price less basis (in this case, obviously 0). I found guidance on the IRS website saying that suspended losses are lost in the event of sale of stock, which will be the case here. I need to see a citation saying I can use the suspended losses (45K +2013 loss) to apply against capital gain on sale (sale price - 0).

Thanks.

ASSAID,because of its tax model, S corps cannot carry forward capital losses to future years. However, owners/ shreholders who receive shares of capital losses as part of its distributions from S corps can deduct certain amounts during the tax year before carrying over the remainder in subsequent years. The reason why S corps cannot carry over capital losses as a company is because of it's pass-through taxation model. Unlike regular corporations, S corps are not taxed as a separate entity. Therefore, profits and losses are "passed through" to its shareholders to be reported on their tax returns. The IRS allows shareholders to deduct capital losses up to $3K per tax year and $1.5K for married couples filing separately. Remaining amounts are carried over to the following tax years.S corps suffer capital losses when it loses value on sales of capital assets. There are different types of properties considered capital assets such as equipment, security investments, trademarks, patents and copyrights. For example, when real estate corporations sell commercial buildings at prices lower than they bought it for can deduct the differences as capital losses;


Subchapter C Corp can deduct capital losses only up to the amount of capital gains. If capital losses exceed capital gains, the excess is first carried back three years prior to the loss year and used to offset capital gains. Then, any unused loss is carried forward up to five years from the loss year to offset capital gains in those years. If the corporation is dissolved, the loss is not carried to any other year or return, it is simply lost.


AICPA - Deducting S Corporation Losses to Extent of Shareholder Basis

NOTE;in the case of sub C corp, C crps may only offset capital losses against capital gains. They may not deduct them from the corp's ordinary income. Net capital losses must first be carried back 3 years and offset against capital gains, if any.

If a loss is not fully applied against capital gains in the carryback period, the remaining loss is carried forward up to a maximum of 5 years.

If after carrying back a net capital loss 3 years and forward 5 years, part of the loss still remains as a result of not having sufficient capital gains to offset the loss against, it is lost forever.