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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29794
Experience:  Taxes, Immigration, Labor Relations
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I owned 20% of S-Corp which is no longer operating (since

Customer Question

I owned 20% of S-Corp which is no longer operating (since 2014). There was an ongoing lawsuit until Mar 2015 at which time judgement was issued for 50K against me (20%) and the other owner (80%). In 08/15, I reached a settlement with the vendor for 24K in exchange for a partial release of the judgement against me but leaving it with the other 80% owner. Although I'm not claiming anything related to the business in 2015, can I deduct the 24K as a loss?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Generally - there are two ways to treat these expenses...

First of all you was an employee of S-corporation - and most likely an officer and that payment is because of your employment. In this case you may deduct the payment as employee business expenses.

Generally, you must use Form 2106 or Form 2106-EZ to figure your deduction for employee business expenses and attach it to your Form 1040 , U.S. Individual Income Tax Return. You then take the deductible expenses on Form 1040, Schedule A , as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit.

Please be aware of such limitations - specifically you are an employee in the same trade or business.

Another option to treat that payment as your contribution into S-corporation and as if S-corporation were making a payment.

That woudl increase your basis in S-corporation shares - and will reduce your gain (or increase your loss) when S-corporation is liquidated. As S-Corp is no longer operating I assume you plan to close it anyway - so that would be an issue.

Any questions?

Customer: replied 1 year ago.
I was not an employee at all during 2015, only a shareholder in a company that wasn't operating at all in 2015. Can I still deduct as employee business expense if I was not an employee during that year?
Expert:  Lev replied 1 year ago.

I understand that you did not receive any wages from S-corporation during 2015 because it closed its operations.

However as long as S-corporation existed - you are still an employee.

In additional - you might be an employee somewhere else in the same trade or business.

So - as long as you have income from wages - I do not see any issues to deduct your employee business expenses which include that settlement.

The issue might be that you should itemize to claim that deduction - and you might not be able fully deduct that amount because of 2% floor limitation.

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