Subchapter S Corporation Liabilities
The liabilities of a partnership increase a
partner’s basis in a partnership. The liabilities of a Subchapter S
corporation DO NOT increase a shareholder’s basis. The only exception to
this rule applies when an individual shareholder directly loans money to
the Subchapter S corporation. Various court cases have ruled that personal
guarantees will not increase the basis.
Limit on Subchapter S Corporation Losses
And Deductions
The amount of losses and deductions a
shareholder can take is limited to the adjusted basis of the
shareholder’s Subchapter S corporation stock, plus any direct loans the
shareholder makes to the corporation. The basis adjustment for a
distribution is taken into account before applying the loss limitation for
the year.
Basis of C Corporation Stock Converted To
Subchapter S Corporation
When a C corporation converts to Subchapter
S corporation status, the shareholder’s stock basis in the C corporation
becomes the beginning stock basis in the Subchapter S corporation. This
basis applies for purposes of limits on deductibility of Subchapter S
corporation losses. A Subchapter S corporation shareholder cannot deduct
losses in excess of basis, even if C corporation earnings were transferred
to the Subchapter S corporation.
