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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I started a company (s corp) last year that was a treasury

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I started a company (s corp) last year that was a treasury management company for some of my other businesses. I also wanted the new company to serve as a consolidated investment company, using the cash flow and income to invest in stocks and options. This new company had losses on the investments for the year of $40,000. To what extent is this deductable and what form should I use? Thanks!

Lev :

Hi and welcome to our site!
Any income or losses realized by S-corporation are passed to shareholders and reported on schedule K1. If a shareholder is allocated an item of S corporation loss or deduction, the shareholder must first have adequate stock and/or debt basis to claim that loss and/or deduction item.

Customer:

The only real activity in this corporation is the stock trading...where do i input the info to get to my k1

Lev :

So - the amount of a shareholder's stock and debt basis in the S corporation is very important. In order for the shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis. Since basis changes every year, it must be computed every year.

Customer:

I really have no basis in the company...its where i trade and invest in the market...and i had losses

Lev :

If that is a loss from stock trading - it is a capital loss - it is reported on schedule K1 - lines 7 or 8a - http://www.irs.gov/pub/irs-pdf/f1120ssk.pdf

Customer:

they are all losses from trading...its basically just that, a trading company

Lev :

You MUST have a basis. In computing stock basis, the shareholder starts with their initial capital contribution to the S corporation or the initial cost of the stock they purchased (the same as a C corporation). That amount is then increased and/or decreased based on the flow-through amounts from the S corporation. An income item will increase stock basis while a loss, deduction or distribution will decrease stock basis.

Customer:

So if I deposited $200k into the company thats my basis? And then i lost $40k in trading...

Lev :

That is correct - $200k of your original contribution is your basis.
If you had a loss of $40k - that loss is reported to you on K1 - and your basis is adjusted. After that year - your new adjusted basis is $160k. Since basis changes every year, it must be computed every year.

Customer:

all of this still goes on my 1120 s ?

Lev :

Yes - the gain/loss is calculated ion 1120S and reported to you as a shareholder on K1.

Customer:

if those are all short term losses on the k1, will they be fully deductable on my personal return or subject to the $3k max? Can i offset other short term gains from other k1's?

Lev :

First of all you determined net capital gain or loss for S-corporation - separately for long term and short term. These amounts are passed to you on K1 without any limit.
On your individual tax return - capital losses are fully deductible against your other capital gains that you might have from other sources..
However - if you had net capital losses - you may only use $3,000 of capital losses to offset other types of income. The rest woudl be carried over to following years.

Customer:

Ok great thanks

Lev :

You are welcome.

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