Impact of net operating losses carryover when I convert to a S Corporation?

Leah · #1 (**permalink**) 01-28-2007, 09:42 PM

Dear Taxguru,

Wow! I can't believe the site! I was here only a week or so ago, and I am impressed with the progress on this site!!! WELL DONE GUYS!!

A technical question for you, what happened to my net operating losses carry over in my C corporation, after I converted to an S corporation??? I am hoping to be able to use them this year to offset my profit from my S corporation!

Looking forward to hearing from you.

Thanks.

TaxGuru · #2 (**permalink**) 01-29-2007, 10:52 AM

Unfortunately, the immediate impact of these losses is that they become suspended!

Yes, it sounds nasty, but it is true, these losses are not deductable nor do they pass through to the individual owners of an S Corporations through the K-1.

Perhaps, you made a hasty move to Convert to an S corporation w/o consideration of the impact of the NOL's. I have seen this time and again where folks are eager to convert to an S Corporation, but forget they have significant prior year losses that can be absorbed by the C corporation on being profitable.

The treatment of these losses is a very complicated subject, suffice to say these losses eventually raise the basis of the shareholder, and in event of sale of the company may help offset the capital gains.