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The S-Corp has two basic accounts for equity if you are a single owner.
The first is usually a Capital stock account, which often has the minimum capital required to issue stock, often this is $1000
The second account is your shareholder equity account. This has any remaining shareholder equity
In the case of an S-Corp, you can never have negative equity. You can reduce your basis to as low as zero, but never further.
So in the case of the above accounts, if the Capital Stock account is +$1000, the minimum shareholder equity is -$1000
Any excess "negative basis" is treated as a NON-deductible loss. It is a "suspended" loss and carries over to future years indefinitely
The loss does not further affect the capital or equity accounts.
Where would I put this non-deductible loss?
You can also use up some of the suspended losses by adding additional equity capital to the corporation
It stays on the P&L and does not get carried to the balance sheet.
Unlike a net profit which increases equity.
It is over 100k, so I am going to have to be taxed on this?
Were you this upside-down when you converted to S-Corp?
Yes, I didn't realize that this was a bad thing, just heard it was great to be an s-corp. Now I wish I hadn't done it.
Yes, you probably do need to wish that. Any further losses in your business are NOT deductible!
I don't think you can even properly start an S-Corp with negative basis.
It would be like starting life being born on the ceiling.
Nothing good comes of it.
There is no way to revoke the S election is there?
When did you make the election?
The beginning of 2012
Well,if you revoke before Mar 15, you can revoke for all of 2013.
You cannot change 2012 retroactively.
All shareholders must agree. I assume that means you have to agree with yourself.
By then I will have already had to pay taxes on the 100k, right? So it doesn't do much good to revoke it.
You don't pay taxes on the -100K equity!
It is not income.
You don't get to deduct any losses for 2012, though, that
's for sure.
Wait, I thought you said I had to put on the P&L?
Sorry, I am a little confused.
It is a SUSPENDED loss.
It falls after all the operating P&L items
I don't have any losses this year, so I don't care about not getting to deduct them.
Okay, so the best thing to do would just do the suspended loss this year and revoke the S-election for 2013.
So the best AND worst case you have in 2012 will be zero taxable income and zero loss.
Before you do that, consult a qualified tax advisor about your specific situation.
Don't need to jump in front of the same train twice.
Thank you so much, you have been very helpful.
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