Depending on the exact circumstances, an S company shareholder who has suspended losses owing to the tax basis or at-risk amount limits may be permitted to deduct the losses if the S corporation status is terminated. It indicates that the tax-basis or at-risk amount limitations prevented them from completely deducting losses from their portion of the S corporation’s activities on their tax return for the current year.
The at-risk amount limitation occurs when a shareholder’s at-risk amount for the S business exceeds the total damages they claim. Capital exposure – shareholder money is at risk due to managerial actions and is a key factor that favors the imposition of a limitation over the granting of discretion. (Falkinger & Habib, 2021) The at-risk amount, which may include a shareholder’s capital contributions or loans to the company, is often the money or property held by the S corporation. Losses greater than the sum deemed at risk are suspended and carried over to the following year.
The shareholders may deduct the suspended losses in the final year of the business’s existence if the S corporation status is terminated owing to the corporation ceasing to exist, such as through liquidation or sale of all its assets. The tax-basis limitation applies when a shareholder’s basis in their S corporation stock is lower than the number of losses they claim. The excess losses are stopped and carried over to the following years in this situation.
When a corporation is terminated, its assets are presumed to be sold, which may result in revenue or losses that can be used to balance delayed losses. The suspended losses often cannot be deducted by the shareholders if the S corporation status is terminated because the business has changed to another sort of entity, such as a C corporation. This is because the corporation is not tax-terminated as a result of the conversion.
S corporation shareholders may be eligible to deduct suspended losses. However, the suspended losses could not be immediately deductible if the S corporation status is revoked, because the company has switched to another form of structure, such as a C corporation. Instead, until the shareholder has a sufficient tax basis or an at-risk amount to claim, the losses will be carried forward.
References
Falkinger, J., & Habib, M. A. (2021). Managerial discretion and shareholder capital at risk. Journal of Business Finance & Accounting, 48(7-8), 1215-1245. Web.