Why Form 1120 C Losses 2023-2024

Hi, I'm John Wong, a CPA and partner at Safe Harbor LLP, an audit firm based in San Francisco, California. Today's topic is S corporation tax write-offs for losses. As corporations have become increasingly popular in recent years, they have become the entity of choice for doing business. Unlike other types of corporations, S corporations do not pay tax on the corporate level. Instead, their income passes through to the shareholder, avoiding double taxation. However, tax laws surrounding the ability to take S corporation losses are extremely complex. There are three major complexities: limitations due to basis, at-risk rules, and passive losses. Taxpayers must have both basis and be at-risk to be eligible for taking S corporation losses. Basis represents what you pay for the stock and increases with earnings and capital contributions. On the other hand, S corporation basis decreases with losses or distributions. Bases can also be increased by direct shareholder loans but not by merely guaranteeing a bank loan. At-risk rules, which have not been finalized by the IRS despite being enacted over 30 years ago, determine how much a person is on the hook for making a payment. These rules are incredibly complex and difficult to navigate. Finally, passive losses are not deductible even if there is enough basis or if a person is at-risk. Passive income arises from businesses or rental income that you do not work at or actively participate in, unless certain conditions are met. In summary, being able to take losses is a good reason to use an S corporation as the choice of entity for your business. However, it is crucial to ensure that you can take all of your S corporation losses. It is highly recommended to contact your local tax professional for tax planning or reach out to us at Safe Harbor LLP via email...