What happens if you have losses in excess of your basis? Are these deductible?

andri · #1 (**permalink**) 03-22-2007, 02:05 PM

Dear Taxguru,

I have an S corporation and it appears that there were substantial losses I incurred in 2006 which exceed my basis. The corporation got a line of credit from the bank and that is how I was able to sustain these losses.

If the losses are not deductible what happens to them? I am expecting the business to get much better in 2007!

TaxGuru · #2 (**permalink**) 03-23-2007, 11:09 PM

The bad news is that you do not have sufficient basis to deduct these losses! The bank loan obtained was under the S Corporations name and despite the fact that you may have had a personal guarantee, by IRS code this does not increase your basis.

If however,you personally lent the corporation money,the extent of the loan would have created additional tax basis for you. The losses would then be deductible to extent of that basis.

Now, it seems the losses exceed your basis, the tax treatment for the S corporation is have these losses suspended for future years to offset taxable income, or else continue to have these losses suspended.

On the positive side, per your comment, you expect the business environment to significantly improve, thus these suspended losses will become realized and will offset the taxable income for the future years.