Deducting S corporation Losses

Assuming you actively participate in the operation of your S corporation and you're not merely a passive investor, if your S corporation suffers a loss in any tax year you can deduct your share of the loss against your other sources of income, such as dividends, interest, your spouse's wages, etc.

The amount of the loss that you may deduct depends on your tax basis. Your tax basis is equal to your stock basis plus your debt

Example:

  • You own a 50% interest in your S corporation.
  • Your new S corporation suffered a loss of $10,000 its first year.
  • Your share of the loss is $5,000 (50% x $10,000).
  • You have a part-time job from which you earned $20,000.
  • You also earned $1,000 in interest and received a dividend of $300 on stock you own.
  • Your total income from your job, interest, and dividend is $21,300.

You can deduct the $5,000 loss from your $21,300 income, reducing it to $16,300.

Caution: You can only deduct an S corporation loss if you have a sufficient tax basis.

What makes up your tax basis is discussed next, under  At-Risk Rules.

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