Ref: Hargis, TC Memo 2016-232

The recent Hargis case serves as a reminder that losses from an S corporation can be used to reduce tax at the shareholder level only IF the shareholder has basis in that S corporation.  Furthermore,  guaranteeing corporate debt will NOT give rise to shareholder basis.

Simply stated, if the corporation is short of funds, the shareholder should either:

1. Directly deposit personal funds to the corporation as either Paid in Capital or a formal loan with written documentation OR
2. If borrowing is required: The shareholder should borrow funds personally and then deposit those funds into the S corporation.

The shareholder has no basis increase for loans to the corporation which he/she guarantees OR loans from other entities which he/she controls.