Per Diem Rates from the U.S. General Services Administration

Search by city, state or ZIP code, or by clicking on the map. You can also use the new per diem tool to calculate trip allowances

Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").

Per Diem Rates

S corporation Shareholder Loss Limitation Rules

---

Your Tax Basis in an S corporation

Your initial tax basis in an S corporation is equal to your investment in the business plus loans you make to the business.

For example, if you own an S corporation and invest $10,000 in its stock and also lend the S corporation $5,000, your tax basis would be $15,000. The amount you invest in the capital stock is called your stock basis and the amount you lend the company is called your debt (or loan) basis. Stock basis and debt basis may be increased or decreased each year by certain items.

Why stock basis and debt basis are important:

When the S corporation's stock is sold or disposed of, its basis needs to be established to determine gain or loss on the disposition of the stock.

In addition, stock and debt basis are also important for determining the potential tax liability of a distribution received by a shareholder and the deductibility of a loss passed through the entity to a shareholder.

For example, if a distribution exceeds a shareholder's stock basis, the excess amount is reported on the shareholder's personal tax return as a capital gain (LT or ST depending on the holding period of the stock).

In addition, if a loss is passed through the entity to its shareholder(s), and the loss exceeds both the shareholder's stock and debt basis, the excess amount of the loss is not deductible in the current year, it is a suspended loss. A suspended loss is carried over to future years and may be deducted when there is sufficient tax basis to absorb it.

Shareholder Loss Limitations

One of the reasons for electing S corporation status is to avoid double taxation of income. An S corporation is a pass-through entity. This means the entity's income, gains, losses, deductions and credits flow through the entity to its shareholder(s), who report these items on their individual income tax return. Since income is not taxed at the entity level (with a few exceptions), as it is for C corporations, double taxation of income is avoided.

Another reason for electing S corporation status is the ability of shareholders to deduct S corporation losses on their personal tax returns. This is where an understanding of the loss limitation rules come in.

While S corporation shareholder's are allowed to deduct losses that are passed through the entity to them, there are four loss limitation rules that must be adhered to.

Four loss limitation Rules:

1. Stock Basis and Debt Basis Limitation
2. At Risk Limitation
3. Passive Activity Loss Limitation
4. Excess Business Loss Limitation

The fact that a shareholder receives a Schedule K-1 annually reflecting a loss, doesn't mean the shareholder is automatically entitled to claim all or part of the loss. Each of the four loss limitations must be met when claiming the loss.

Stock and Debt Basis Limitations

S corporation shareholders are required to compute both stock and debt basis. Keep in mind, it's not the corporation's responsibility to track a shareholder's stock and debt basis, it is the shareholder's responsibility.

Each year, a shareholder's stock and/or debt basis increases or decreases based on the S corporation's operations. For example, net income increases stock basis while a net loss decreases stock basis. Debt basis may be increased if a shareholder lends the S corporation funds and decreased when the loan is paid down.

The S corporation issues Schedule K-1 annually to its shareholders. K-1 is used to report each shareholder's share of the S corporation's annual income, gains, losses, deductions and credits.

While Schedule K-1 may show the amount of a non-dividend distribution that a shareholder receives, it does not state the taxable amount of such distribution. The taxable amount of a distribution depends on the shareholder's stock basis. Debt basis is not taken into account when figuring gain on a distribution.

Loss and Deduction Pass-Through Items:

If a shareholder is allocated an item of S corporation loss or deduction, the shareholder must first have adequate stock and/or debt basis to claim that loss and/or deduction item.

(Note that, even when the shareholder has adequate stock and/or debt basis to claim the S corporation loss or deduction item, the shareholder must also consider the at-risk and passive activity loss limitations, and therefore, may not be able to claim the loss and/or deduction item.)

The Ordering Rule:

When reducing your S corporation stock basis and debt basis, you need to follow the IRS's ordering rule.

The following is the ordering rule for reducing your stock and debt basis:

1. Stock basis gets reduced first, but not below zero.
2. Debt basis (if any) gets reduced next, but not below zero.
3. The portion of a loss that exceeds both your stock basis and loan basis is a suspended loss. A suspended loss is not deductible in the year it occurs; it may be carried over to future years indefinitely and deducted in any year where there is sufficient tax basis (stock basis plus debt basis) to absorb it.

Example:

On December 31, 2021:

• Your stock basis is $5,000
• Your loan basis is $3,000
• Your tax basis is $8,000 (stock basis $5,000 plus debt basis $3,000)
• The S corporation had a $10,000 loss
• You actively participated in the business.

You must reduce your tax basis in the following order:

• First, reduce your stock basis by $5,000 to a zero balance.
• Next, reduce your loan basis by $3,000 to a zero balance.
• This brings your tax basis at the end of 2021 to zero.
• You have a $2,000 suspended loss for 2021 because your $8,000 tax basis was not sufficient to absorb the entire $10,000 loss. In addition, you did not restore your tax basis in 2021 to cover the $2,000 excess loss.
• You carry the $2,000 suspended loss over to the following year (2022).

Restoring Tax Basis (stock basis plus debt basis):

You may restore your tax basis at any time by either increasing your capital investment (stock basis) or lending money to the S corporation (debt basis). However, just as there is an IRS ordering rule for reducing your tax basis (stock basis plus debt basis), there's also an ordering rule for restoring your tax basis.

Restore your tax basis in the following order:

1. First, restore your debt basis to its original amount.
2. Next, restore your Stock basis.

Note: In the previous example, had debt basis been restored by $2,000 by the end of 2021, the entire $10,000 loss would have been deductible by shareholders in 2021.

At Risk Limitation

The at-risk rule deals with the amount of your investment in a business that you are personally at risk of losing if the business fails. In other words, this rule has nothing to do with whether the business itself is at risk but rather what you, personally, are at risk of losing.

Purpose of the At-Risk Rule

The purpose of the at-risk rule is to prevent you from claiming a loss in excess of what you actually stand to lose. Only the amount you are personally at risk of losing counts towards your at-risk basis, which is also called your tax basis (your stock basis and debt basis).

Passive Activity Loss Limitation

Purpose of the Passive Activity Loss Limitation Rule:

The passive activity rules are designed to prevent passive activity losses from being deducted against nonpassive income, such as wages (earned income), interest and dividends (portfolio income). In addition, passive activity credits may only be deducted from the tax on passive activity income. Passive activity credits include the general business credit and other special business credits.

There are two kinds of passive activities:

1. Trade or business activities in which you do not materially participate during the year.
2. Rental activities

Although rental activities are always considered passive activities (except for real estate professionals), a special rule allows real estate nonprofessionals to classify up to $25,000 of rental losses as nonpassive.

This means, up to $25,000 of rental losses may be deducted from nonpassive income (i.e. your or your spouse's wages from a job, interest and dividends). But, you must actively participate in the activity to get this deduction.

Active participation simply means, participating in the management of the rental property, such as approving leases and prospective tenants, approving maintenance and repairs expenses, etc. Using a professional property management company is also considered when determining active participation.

Excess Business Loss Limitation

If you are a non-corporate taxpayer and have allowable business losses after taking into account first the at-risk limitations and then the passive loss limitations, your losses may be subject to the excess business loss limitation.

After taking into account all the other loss limitations (stock basis and debt basis limitation, at-risk limitation, and passive activity loss limitation), complete Form 461, Limitation on Business Losses, to figure the amount of your excess business loss. Taxpayers can't deduct an excess business loss in the current year. However, the excess business loss is treated as a net operating loss (NOL) carryover.

The amount by which your total deductions from all your businesses are more than your gross income or gains from all of your businesses plus a threshold amount, is an excess business loss. The threshold amount for 2021 is $262,000 ($524,000 if Married Filing Jointly). Any disallowed excess business loss is treated as a net operating loss (NOL) carryforward, subject to the NOL rules.

Important IRS Notice:

Form 461 doesn’t exist for 2020 but will be issued beginning with 2021. Please review the updated information below.

Limitation on business losses for certain taxpayers repealed for 2018, 2019, and 2020. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), amended section 461(l) to restrict the limitation on excess business losses of noncorporate taxpayers to tax years beginning after 2020 and before 2026. The Act repealed the limitation for tax years 2018, 2019, and 2020. If you filed a 2018 and/or 2019 return(s) with the limitation, you can file an amended return. See the notice: Form 461 IRS notice

Example: Lewy is single. For tax year 2021 he has gross income of $300,000 and deductions of $650,000 from his hardware business. His excess business loss is $88,000 [$300,000 -($650,000 + $262,000)]. Lewy must treat the $88,000 excess business loss as an NOL carryforward to 2022.

For pass-through entities (partnerships, single-member and multi-member LLCs that have not elected to be treated as a C corporation and S corporations) the excess loss limitation applies at the individual, partner and shareholder level.