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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I converted from a single member LLC to an S corp in 2012.

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I converted from a single member LLC to an S corp in 2012. I had negative equity due to taking accelerated depreciation in prior years. How do I show this on the Balance sheet of the S corporation?

Randalltax :

The S-Corp has two basic accounts for equity if you are a single owner.

Randalltax :

The first is usually a Capital stock account, which often has the minimum capital required to issue stock, often this is $1000

Randalltax :

The second account is your shareholder equity account. This has any remaining shareholder equity

Randalltax :

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.

Randalltax :

So in the case of the above accounts, if the Capital Stock account is +$1000, the minimum shareholder equity is -$1000

Randalltax :

Any excess "negative basis" is treated as a NON-deductible loss. It is a "suspended" loss and carries over to future years indefinitely

Randalltax :

The loss does not further affect the capital or equity accounts.

Customer:

Where would I put this non-deductible loss?

Randalltax :

You can also use up some of the suspended losses by adding additional equity capital to the corporation

Randalltax :

It stays on the P&L and does not get carried to the balance sheet.

Randalltax :

Unlike a net profit which increases equity.

Customer:

It is over 100k, so I am going to have to be taxed on this?

Randalltax :

Were you this upside-down when you converted to S-Corp?

Customer:

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.

Randalltax :

Yes, you probably do need to wish that. Any further losses in your business are NOT deductible!

Randalltax :

I don't think you can even properly start an S-Corp with negative basis.

Randalltax :

It would be like starting life being born on the ceiling.

Randalltax :

Nothing good comes of it.

Customer:

There is no way to revoke the S election is there?

Randalltax :

When did you make the election?

Customer:

The beginning of 2012

Randalltax :

Well,if you revoke before Mar 15, you can revoke for all of 2013.

Randalltax :

You cannot change 2012 retroactively.

Randalltax :

All shareholders must agree. I assume that means you have to agree with yourself.

Customer:

By then I will have already had to pay taxes on the 100k, right? So it doesn't do much good to revoke it.

Randalltax :

You don't pay taxes on the -100K equity!

Randalltax :

It is not income.

Randalltax :

You don't get to deduct any losses for 2012, though, that

Randalltax :

's for sure.

Customer:

Wait, I thought you said I had to put on the P&L?

Customer:

Sorry, I am a little confused.

Randalltax :

It is a SUSPENDED loss.

Randalltax :

It falls after all the operating P&L items

Customer:

I don't have any losses this year, so I don't care about not getting to deduct them.

Customer:

Okay, so the best thing to do would just do the suspended loss this year and revoke the S-election for 2013.

Randalltax :

So the best AND worst case you have in 2012 will be zero taxable income and zero loss.

Randalltax :

Before you do that, consult a qualified tax advisor about your specific situation.

Randalltax :

Don't need to jump in front of the same train twice.

Customer:

Thank you so much, you have been very helpful.

Randalltax :

Please remember to provide a rating for our chat today. Thanks and have a great day

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