Hi Tax Guru,

I posted this message earlier today but I don't see it listed in the forum.

I am hoping you can provide some guidance about how best to handle shareholder loans made to an s corp that was dissolved in 2008. The loans are still outstanding.

Some Information:
1. Only shareholder.
2. Ended business operation 6/30/2008.
3. Short year return
4. Outstanding loan balance $9000.
5. Small profit for 2008
6. No cash available to repay loan
7. Balance sheet has been zeroed out.

Questions:
1. Can I deduct loans made to s corp on my personal tax return?
2. If not, can loans be reclassified as additional paid in capital and claimed as a loss?
3. What are tax implications for assets purchased in the last 7 years? All have either been fully depreciated or section 179 deductions have been taken. Not much market value, if any in assets. Last asset purchase was a notebook computer purchased in 2006 ($1500).

Thank you,

To answer your series of questions on the S Corporations;

1. Can I deduct loans made to s corp on my personal tax return?
You generally cannot deduct loans made to an S Corporation on your personal tax returns. But, if the corporation has been dissolved, and the loans cannot be repaid, these loans can be treated as bad debts on your personal tax return with the limitation for capital loss deductions applied (ie maximum of $3,000 per year).

2. If not, can loans be reclassified as additional paid in capital and claimed as a loss?
No need to do this as you can deduct the loans unpaid as bad debt as explained on point 1.

3. What are tax implications for assets purchased in the last 7 years?
As such, there is nothing that you can do here other, I am assuming the computer is not worth anything and you have fully depreciated this asset. Now, if the corporation sells assets with a Zero basis, any amounts received would be subject to capital gains and would be reported on the K-1 to you the individual shareholder.

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Ask TaxGuru Please refer to the legal disclaimer.

"Now, if the corporation sells assets with a Zero basis, any amounts received would be subject to capital gains and would be reported on the K-1 to you the individual shareholder."

All assets have been fully depreciated or section 179 deduction taken. Some of assets may still have some market value. In lieu of reflecting amounts received from shareholder on a K-1, can assets be used to repay part of loan balance?

Yes, the assets can be used to repay the shareholder loans!

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Ask TaxGuru Please refer to the legal disclaimer.

Thank you for your help.