The IRS has announced that they will be sending letters to a select group of S Corporation shareholders. The letter is in relation to S Corporate shareholders claiming a loss on their personal return in excess of their basis in the Corporation.
A shareholder’s basis in an S Corporation starts with the cost that was paid for the stock or the acquired basis if the stock was gifted or inherited. From that point the major adjustment items include adding any income, subtracting any losses (even if nondeductible), and subtracting distributions to shareholders. These items are all reported to the shareholder by the Corporation on their K-1 tax reporting form each year. A shareholder also can add any loans that they have directly made to the Corporation. Loan guarantees do not count as additional basis, but direct loans to the Corporation do increase a shareholder’s basis.
It is uncertain who will be receiving this letter from the IRS and if any information will be requested. As always, be sure to give us a copy of any tax related correspondence you receive so we can determine if any action needs to be taken.
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