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BK-CPA, Certified Public Accountant (CPA)
Category: Capital Gains and Losses
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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The s corp has the following losses: 2006.......12000 loss 2007......15000

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The s corp has the following losses:
2006.......12000 loss
2007......15000 loss
2008.......23000 loss
2009......5600 profit
2010......45000 loss
2011.....23000 loss
2012......3200 profit
2013......1200 loss
2014.....7500 profit
The s corp sold for $360k. The allocation was $60 k assets and $300 k goodwill. Can the accumulated losses of Scorp  offset the capital gain on sale?
Submitted: 11 months ago.
Category: Capital Gains and Losses
Expert:  BK-CPA replied 11 months ago.
Hello and thank you for your question. Generally, the answer to that question is, "no." Let me clarify that, however. Shareholders of a s-corporation deduct the losses that flow to them in the year sustained subject to some limitations. Presumably, the shareholders have deducted these losses in prior years against their other income. If shareholders do not have enough basis in the s-corporation to deduct the losses, they must carry them forward to future years when they establish enough basis to deduct them. Gains on the sale of the s-corporation's assets will flow through to the shareholders and increase their bases in the s-corporation, which may then enable them to deduct prior years' losses that have been carried forward (and offset the gains on the sale in the process). S-corporation shareholders may also be unable to deduct losses if they are subject to the passive or at-risk limitations. Passive losses are deductible in the final year of an activity, however, so again these may have carried forward and now be available to offset the gains. The same goes for losses that have been carried forward on account of the at-risk limitations. The gains may result in those losses becoming available for use. So, the true answer to your question takes place at the shareholder level and may be different for each shareholder. For a shareholder that has been able to deduct losses in the prior years' because the shareholder had adequate basis and both the passive and at-risk limitations did not otherwise prevent deduction, then the gains are going to be fully recognized. For a shareholder that has been forced to carry forward the losses because of the limitations, some of the gains may be offset. All too often, shareholders (unknowingly) ignore the limitations and deduct losses anyways. Those shareholder will obviously be recognizing gains now. It's possible for a shareholder to, for example, have a basis of $1,000,000 in the s-corporation at the time of its liquidation. If the shareholder only receives, say, $100,000 in liquidation, then that shareholder would have a $900,000 capital loss. I doubt any shareholder has that much basis given your figures, but just to make the point: if a shareholder receives in liquidation an amount that is less than the shareholders' adjusted basis in the s-corporation, that shareholder will recognize a loss, the extent of which may more than offset any gains recognized by the s-corporation and passed through to the shareholder upon the sale of the s-corporation's assets. So, to summarize, no, the s-corporation's prior losses are not able to offset the s-corporation's gains on the sale of its assets, but both shareholders forced to carry forward losses because of limitations and shareholders that recognize a loss in liquidation may find themselves offsetting some of the gains that flow through to them on the sale of the s-corporation's assets. The story will be different for each shareholder. I hope this is helpful.