My wife draws a reasonable salary from the business, I do not, but I do a good deal of work for the business. Can I claim a loss based on my initial investment since I do not draw a salary, or can only my wife claim a loss?.============>>>>>>> Before you enter losses reported on a K-1 schedule from an S corp into your personal tax return, you must be sure you have enough basis as a shareholder to claim the losses.as you actively participate in the operation of your S corp and you're not merely a passive investor, as your S corp suffers a loss in any tax year you can deduct your share of the loss against your other sources of income, such as dividends, interest, your spouse's wages, etc The amount of the loss that you may deduct depends on your tax basis. You tax basis is equal to your stock basis plus your debt IRS has authority to reclassify draws/distributions or other payments to a shareholder if the shareholder has not taken a reasonable salary for the work performed by the shareholder. If you have taken nothing out of the S-corp, you do not have to take a salary. The S corp may deduct the compensation expense and must pay the employer share of employment taxes:as the biz lost money, it doesn’t need to pay any salary to her.
Does it matter since we are married and file joint return? =============>>>>>>>> IRS considers married taxpayers as one. It is advisable to report it separately on Sch E - listing it as - one owned by taxpayer and one by spouse.
Tax effect would normally be the same.
How should I set up our initial basis?=========>>>>>>>> Since you are operating an S corp, your basis is the sum of origninal investment, plus net loans made by you to the corp, plus undistributed profits or retained earnings. An income item will increase stock basis while a loss, deduction, or distribution will decrease stock basis.
Majority from my wife in order to maximize our ability to claim losses if I can not claim based on having no salary?===============>>>>>>as mentioned sbove.