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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I have a start up company (company A) that has a operating

Resolved Question:

I have a start up company (company A) that has a operating loss for the past few years which I have covered personally and showed it as a loan payable, No taxes paid in since there was no profit obviously.

I also have a partial interest in a separate company (company b) that has been profitable and personal taxes paid in to the IRS accordingly.

When I filled my taxes personally I was expecting to be able to recover some of my losses from Company A from the taxes I personally paid in against Company B. My accountant said that because I originally showed my cash injections as a loan and the company was new that I did not have a large enough basis in company A to get a refunds.

The question is if I convert the loan payable so that it is a injection of cash/equity, can I then get a personal refund up to the amount of taxes paid in personally for company B's profit?
Submitted: 5 years ago.
Category: Tax
Expert:  socrateaser replied 5 years ago.
In order to do what you are attempting, you would have to amend your prior year tax returns to treat your original payment as a capital contribution. If the IRS were to audit you, the auditor would want to see the "loan" documents. If there were no loan documents, then your conversion would almost certainly be disallowed, because you have already filed tax returns certified under oath that those returns were accurate.

If you convert the loan now, then future losses from one business could offset gains from the other. But that won't help you with past tax years.

Thus, the short answer here is "probably no." Personally, I think it would be a risky maneuver.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!

Customer: replied 5 years ago.

Instead of ammending the return couldn't I convert the loan on the newest return which would increase the basis. Then wouldn't prior years losses be able to be carried forward which would provide a return of some of those previous taxes paid?

Expert:  socrateaser replied 5 years ago.
In my opinion, by converting the loan in the 2011 tax year, for example, you would be making the contribution during the 2011 tax year, which would have no affect on your taxable income/expenses or returns for prior years, and which would mean that there would be no losses to carry forward for those prior tax years.

If my argument were wrong, then anyone could change their position on any tax activity at any time, and have it retroactively affect all prior tax years. That is what the IRS and the courts regard as a frivolous tax argument, and it can lead to some very serious negative consequences.

I think that what you are suggesting could get you into a load of trouble, if you get audited. Of course, you may not get audited -- but, from where I'm sitting, you're taking a big risk.

Hope this helps.


And, if you need to contact me again, please put my user id on the title line of your question (“ToCustomerrdquo;), and the system will send me an alert. Thanks!

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