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You should be able to take 100% of the portfolio losses in the year of loss. Note that the holding of investments like hedge funds is not a passive activity, it is a portfolio activity and is not governed by the passive activity loss rules. (see the S-corp Schedule K1 instructions here, under Portfolio Income - http://www.irs.gov/instructions/i1120ssk/ch02.html#d0e691)
Note though that you are most likely limited to the capital loss rules when you disposed of the partnerships. You are only allowed to deduct up to $3,000 annually of capital losses but you can also apply losses to capital gains. (meaning that the most you can deduct net of capital gains is a $3,000 loss)
If you dispose of the S-corps it won't allow you to realize more of the capital losses, they are suspended because of the capital loss limitation and not because of the passive activity limitation.
I hope this provides the clarity you were looking for, please let me know if you have any further questions.
these were active businesses and never intended to be passive investments. they only became inactive because of the foreclosure of the dinner cruisers.
should i just keep the companies open as i have been? that was what i was told by a tax attorney previously but now that i am resolving the open tax issues with the state i'm not sure if that would change things.
I forgot to mention that these were previously declared NOLs.
i think i found the answer on some tax site. it said that NOLs can be carried forward for 20 years unless there was a short year in which it was only six. i had one short year in the mix.
can i still take the losses up to my basis until it is depleted or am i limited because they then become an investment vs. an ongoing business. - there are really two issues at play here. (1)The investment in the hedge funds would give rise to a capital loss which would be passed through to you 100% through the S-corp, thus the S-corp itself would have no suspended capital losses.
I am somewhat confused because you stated the S-corps just held the hedge funds. If that is the case there should be nothing left in the S-corps to give rise to losses. (2) All that would be left would be your holdings of the S-corp stock. When you dispose of the S-corp you can take any losses on the disposal of the s-corp stock but not before you dispose of them. (note that the disposal of the s-corp stock would give rise to capital gain or loss which would be subject to the capital loss limitations)
I hope this makes it a little clearer for you. You may have triggered a personal NOL which would be deductible as you mention above.
Let me know if you have any further questions on this.
it's confusing but the hedge fund really had nothing to do with the company. they bought the actual loan on the dinner cruisers from citibank. it may have been an investment from their perspective but we had nothing to do with them from a business perspective. it was like any other finance company owning a loan.
they foreclosed on the dinner cruisers a few years after they acquired the loan for fraudulent reasons. they said the sba wouldn't allow us to sell one of the boats and pay off the loan when we had an all cash deal deposited. the sba later said that was a complete story. they did that to many of the companies whose loans they held and that's why they are being prosecuted by the sec.
our nol came from our business operations not from anything to do with the hedge fund. we were 9/11 victims and the business never really returned because people weren't interested in renting boats after 9/11 at the prices before 9/11 or in many cases at all because of general terrorism fear.
OK understood. If you liquidate the S-corps then this will give rise to a capital loss (most likely as it sounds as if your basis exceeds any cash you will get). Basically what happens is you return your shares for cash and the S-corp balance sheet closes to zero and files a final tax return.
You will experience a capital loss which will be subject to the capital loss limitations.
So I think this answers your original question? Please let me know if something is not clear. My apologies for getting this a little long winded...
thanks. then i think i'm bettter off paying the minmum corporate tax each year and keeping the companies open until the basis is depleted. that will just be another year or two anyway. that way in case another lien holder shows up it can go against the company.