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Old 02-13-2014, 03:53 PM
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Sale of business - S Corp - loss and loan

Hello,
I have S corp - initial and final year as 2013 - sold the business during 2013 - has a loss of 25K and the ending loan basis from shareholder is 25K at the end - certainly this loss (ordinary operating loss and ordinary loss on sale since less than a year) is deductible as the s/h has loan basis.

I did a Journal entry for closing the loan from s/h:
Loan from S/H Debit 25K
AAA Account Credit 25K
So my books are done.

Now in tax return - how do I show this increase / credit of 25K in AAA, Schedule M-2?
I was thinking about putting it on Line 3, Other additions in Schedule M-2 of 1120S by labeling as "Deemed Contribution"

Would it be appropriate?

Thanks,
Sammie



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Old 02-14-2014, 01:32 AM
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Posts: 5,236
Quote:
Originally Posted by Sammie View Post
Hello,


#1;I have S corp - initial and final year as 2013 - sold the business during 2013 - has a loss of 25K and the ending loan basis from shareholder is 25K at the end - certainly this loss (ordinary operating loss and ordinary loss on sale since less than a year) is deductible as the s/h has loan basis.

I did a Journal entry for closing the loan from s/h:
Loan from S/H Debit 25K
AAA Account Credit 25K
So my books are done.



#2;Now in tax return - how do I show this increase / credit of 25K in AAA, Schedule M-2?
I was thinking about putting it on Line 3, Other additions in Schedule M-2 of 1120S by labeling as "Deemed Contribution"

Would it be appropriate?

Thanks,
Sammie
#1;I guess so apparently in this case, so thes/h would have basis to deduct the loss on his personal return since loans are loans, increasing basis only to the extent that they are needed to take losses. ;however, there are some exceptis in te case of S corp with severl sudiary S corps.The s/h loan to corp may not generate TP’s, I mean the s/h’s basis; the s/h is able to loan money to the S corp and increase his stock basis by the amount of the loan to the biz. However, basis is increased for debts only aslongas there is an actual economic outlay by the s/hand the S corp is obligated to pay off the debt. So, the loan must have substance and the TP, the s/h must be at risk.In genral, a s/h of an S corp sometimes loans money to the biz. Then, he becomes a creditor and has a right to a repayment of the s/h loan upon dissolution of the S corp, if it has not been repaid previously.An issue may be: if the s/h loan is considered loan or is treated as creating a new class of stock for the s/h. This is important not only for tax purposes but also for the right of the s/h to reclaim that loan upon dissolutionof the biz.As a reditor of the biz, the s/h is usually paid before other stakeholders and in accordance with the extent to which their loans are subordinated to other debt. aslongas a s/h makes a loan to the biz, he has a right to have that loan repaid before assets are distributed to other stakeholders in general.



I did a Journal entry for closing the loan from s/h:
Loan from S/H Debit 25K
AAA Account Credit 25K
So my books are done.

#2; you can have negative AAA as you have aloss on 1120S. It doesn't make any difference; you need to show the b/s on Sch L of 1120S as right before/ right after/ the dissolution;a distribution in excess of AAA is not reported on M-2. The AAA balance cannot be reduced below zero by distributions to s/h.



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