If you’re getting ready to close your #S-corporation, you’re probably wondering what to do about those suspended losses. Suspended losses in an S-corporation arise when a shareholder’s losses exceed their basis in the corporation. These are the losses you couldn’t deduct in previous years because they exceeded your basis and the loses were carried forward. Now that you’re winding the operations down, it’s important to know how to handle them.
What Should You Consider?
Increasing Your Basis:
One of the first things we’ll look at is whether we can increase your basis before the company closes. This could involve putting more money into the business, lending it some funds, or even bringing in a bit more income in this final year. The idea is to raise your basis so that you can absorb more of those suspended losses.
Final Year Deductions:
In the final year, you can deduct any remaining suspended losses against your other income, but only if your basis covers them. When the #S-corporation is terminated, any suspended losses become fully deductible up to basis. This is why it’s so crucial to have accurate records of your basis—we want to make sure you’re getting the full benefit of those deductions.
Liquidation Distributions:
When we talk about liquidating the business, how we distribute the remaining assets affects the tax consequences. Whether the money you get is treated as capital gains or ordinary income can make a difference in your taxes. Also, this distribution will impact your basis and, consequently, how much of those suspended losses you can deduct.
Considering a Tax-Free Reorganization:
While this option doesn’t directly help with suspended losses, it’s worth thinking about. Depending on your situation, a tax-free reorganization could be a smart move, allowing us to manage when you recognize gains or losses, which might be beneficial for your overall tax picture.
Timing of Deductions:
We’ll also need to look at the timing of your income and expenses. Aligning these in your final year could help maximize the use of those suspended losses.
Let’s Discuss the Details:
Given the complexities of this process, it’s important we walk through your specific situation together. Rose Group is here to help make sure everything is done right and that you’re optimizing your tax situation as we close things out.
Example Scenario
To give you a quick example, imagine you’ve got $50,000 in suspended losses and a basis of $30,000. In your final year, you might:
- Increase Your Basis: We could look at ways to raise your basis by $20,000, bringing it up to $50,000.
- Deduct the Losses: With that higher basis, you’d be able to fully deduct those $50,000 in suspended losses against your other income.
Managing suspended losses as you close your #S-corporation requires advanced planning, but with the right approach, you can make sure you’re not leaving any tax benefits on the table. Please tell us if you are planning to wind down the business so we can plan to make a smooth transition during the termination of the S-corporation. We do not want to get to tax time and have you announce that you closed the business when it is too late for us to consider the tax consequence and plan for the final year.
