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rakhi.v
rakhi.v, Tax Attorney
Category: Tax
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Experience:  Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
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As a S Corp shareholder, I would like to know if there are

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As a S Corp shareholder, I would like to know if there are any disadvantages to making the election under Regulation Sec. 1.1367-1(g) to first decrease basis with losses, then with non-deductible expenses, allowing the non-deductible expenses then to be carried over into subsequent years. I understand that in a year where losses and non-deductible expenses exceed basis, that making this election would increase the allowable loss that could flow to the personal return. However, I am interested to understand if there is a future scenario that would be disadvantaged as a consequence of making this election.

Also, can this election be made in any tax year, or just in the first year for which reporting for a particular S Corp is made on one's personal return. Is there anything else to consider in making this election?

Thank you.
Submitted: 1 year ago.
Category: Tax
Expert:  Rachel-Mod replied 1 year ago.
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Customer: replied 1 year ago.


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Expert:  Rachel-Mod replied 1 year ago.
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Expert:  rakhi.v replied 1 year ago.
Dear Friend, Hello and welcome...

Welcome to Just Answer.. Your business is valuable to us.

Apparently speaking, I see no disadvantages to making the election under Regulation Sec. 1.1367-1(g) that you may face in future.

The logic of the regulation is that the IRS will give the taxpayer a break by allowing the deductible losses first when there is a basis limitation. But, since they want your basis to ultimately absorb the non-deductible expenses, you promise to carry them forward to a subsequent year when you do have enough basis to absorb them. That way it is just a timing difference as opposed to a permanent difference. So if it seems that the election will benefit the taxpayer in the basis limitation year, you can do it.

FURTHER, as you know, Regs. Sec. 1.1367-1(g) provides an elective ordering rule under which a shareholder may elect to decrease basis under Regs. Sec. 1.1367-1(f)(4) prior to decreasing basis under Regs. Sec. 1.1367-1(f)(3). Thus, the shareholder may elect to allow his or her separately and non separately stated items of loss or deduction to reduce basis prior to the nondeductible expenses. The regulation continues by saying that if a shareholder does make this election, any amount of deduction described in Regs. Sec. 1.1367-1(f) (3) (i.e., the nondeductible, non capital expenses) that exceeds the shareholder's basis in stock and indebtedness is treated, solely for purposes of this section, as such an amount in the succeeding tax year. Thus, if the Regs. Sec. 1.1367-l(g) election is made, the nondeductible, non capital expenses will carry forward until used to reduce stock or loan basis in a future year. Furthermore, once a shareholder makes an election under Regs. Sec. 1.1367-l(g), he or she must continue to use those rules for that S corporation in future tax years unless the shareholder receives permission from the IRS.

The botXXXXX XXXXXne is, I do not see any future disadvantage and you can opt for it.

I am sure this would help.

You may leave a positive rating if this helps, OR please feel absolutely free to revert for further clarifications and I shall be more than happy to keep assisting you.

Warm Regards
Customer: replied 1 year ago.

Hello,


 


Thank you for your explanation. It makes sense that in the year that this election is made, the taxpayer is advantaged to be able to utilize deductible losses prior to non-deductible losses first when there is a basis limitation, so as to maximize the allowable loss on the personal tax return.


 


However, over the course of a multiple year period in which there are annual losses in at least some of those years, isn't there a net disadvantage to making this election because overall, basis will end up lower as a consequence of always carrying over unused non-deductible expenses versus having them potentially go unused and non carried over in a basis-limited year (if the election had not been made)?


 


Also, I assume this election can be made in any year without consequence for past annual filings. Is that correct? Thank you

Expert:  rakhi.v replied 1 year ago.
Dear Friend, hello and welcome again.

Tanks for your follow up question. As I mentioned in my original reply, this election should be done only with a purpose. In my opinion, in either way, the net result would be same and there would no NO net disadvantage.

This is because you want your basis to ultimately absorb the non-deductible expenses, you promise to carry them forward to a subsequent year when you do have enough basis to absorb them. That way it is just a timing difference as opposed to a permanent difference. So if it seems that the election will benefit the taxpayer in the basis limitation year, you can do it.

You are CORRECT to understand that this will have no consequence on past filings....

I am sure this would help.

You may leave a positive rating if this helps, OR please feel absolutely free to revert for further clarifications and I shall be more than happy to keep assisting you.

Warm Regards
Customer: replied 1 year ago.

Hello,


Thank you, XXXXX XXXXX makes sense in the scenario where the election is made. My question was meant to compare making the election vs. not making the election based on the impact over several years, not just year one. Sorry for not being more clear earlier.


 


Setting aside the assumed tax benefit of making the election in "year one," my question is if there is a net disadvantage to making the election vs NOT making the election within a multiple year period for a S Corp with some number of years of business losses because basis would ultimately be lower due to reducing basis by non-deductible expenses that would otherwise not have been carried over in those years of S Corp losses.


 


(My assumptions are (1) if the election is NOT made, then in a loss year where non-deductible expenses exceed basis, those expenses do not carry over and essentially have no impact to basis; (2) if the election IS made, then under the same circumstances, these expenses carry over indefinitely and thus will ultimately lower basis.)


 


Thanks for your patience, I appreciate your assistance.

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

Yes, what you said is quite right. While one makes an election, it has to be done with a purpose, and it is lowering of the basis.

Your assumption is perfectly correct that a loss year where non-deductible expenses exceed basis, those expenses do not carry over will have NO impact to the basis if the election is NOT made and it will LOWER the basis if the election is MADE. However, once made, will not carry any disadvantage as it is always a part of strategic planning.

I am still sorry if I am missing out on any aspect of your question.

You may leave a positive rating if this helps, OR please feel absolutely free to revert for further clarifications and I shall be more than happy to keep assisting you.

Warm Regards
Customer: replied 1 year ago.


Hello,


 


Thank you for your clarifications and confirmations. I have only have one more question. Given everything you have explained, and comparing making the election to not making the election and only considering the long-term impact, that making the election will result in a lower long-term basis than not making the election. Is that correct?


 


Thank you.

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

Hello and welcome again and thank you for your follow up question.

YES.. you have understood it perfectly right. You have very rightly understood that making the election will result in a lower long-term basis than not making the election.

You may leave a positive rating if this helps, OR please feel absolutely free to revert for further clarifications and I shall be more than happy to keep assisting you.

Warm Regards..
rakhi.v, Tax Attorney
Category: Tax
Satisfied Customers: 3887
Experience: Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
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