Academic journal article Journal of Accountancy

Acquiring Basis in S Corp Shareholder Loans

Academic journal article Journal of Accountancy

Acquiring Basis in S Corp Shareholder Loans

Article excerpt

Practitioners routinely face the challenge of helping S corporation shareholders increase their basis for purposes of deducting pass-through losses under IRC [section] 1366(d)(1). Often, planning to increase basis will result in shareholders making loans to the S corporation at yearend. In situations involving shareholder loans to S corporations facilitated by borrowings from a related entity, such as back-to-back and circular loans, the Tax Court continues to require that shareholders make an "economic outlay" to acquire basis.

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Under the economic outlay doctrine, to obtain basis in a loan to an S corporation, a shareholder must make an actual economic outlay, the outlay must somehow leave the shareholder poorer in a material sense, and the debt created must run directly between the shareholder and the S corporation. Therefore, practitioners need to exercise care in the construction of shareholder loans to S corporations to provide the best opportunity for increasing basis for deduction of losses.

KEY ISSUES

Practitioners advising on proper methods to use for shareholders to acquire basis in loans made to S corporations incurring losses should bear in mind several key issues:

* Identify S corporations with basis limitation issues as soon as possible to emphasize to shareholders the importance of structuring S corporation loans as coming directly from shareholders and to minimize last-minute recharacterization of advances from related entities as back-to-back loans from shareholders.

* Properly document, through interest-bearing promissory notes and contemporaneous corporate minutes, shareholder loans to S corporations. …

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