Using S corporation loss: Basis

Posted on by Craig Mathias

Ref: Hargis v. Koskinen, 2018 PTC 184 (8th Cir. 2018)

This case serves as a reminder that signing a loan with the S corporation as a co-borrower or guarantor doesn’t give the shareholder basis in the debt.  The lack of basis can keep you from using an S corporation loss on your individual tax returns.  If you are a shareholder in an S corporation running a loss and needing cash flow, you should:

  1. Borrow money at the shareholder level and/or tap into personal (non-retirement) savings.
  2. Lend the money to the S corporation yourself.
  3. Draw up a note at the time you lend to the S corporation.
  4. Be sure that the note is documented in the S corporation minutes.
  5. Be sure that the S corporation pays interest at least annually and issues you a Form 1099-INT.

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