S corporation shareholders may soon be getting a form to assist in figuring their tax basis.
Owners of S corporations can deduct losses only up to their stock basis and loans they make to the firm. But the IRS knows that taxpayer compliance in this area is sorely lacking.
The Service’s Large Business and International Division has plans to ramp up enforcement efforts to curtail losses claimed in excess of basis.
According to the IRS it plans to create the new form to help shareholders properly compute basis. This will then be used in audits, soft letters and educational outreach to boost compliance.
An example in which an S firm owner took losses in excess of basis: the S corporation took out a bank loan, and its owner agreed to act as the guarantor.
Four years later, the firm liquidated but continued its operations using the same name.
The bank renewed the loan, with the company as the named borrower on the debt. The owner made loan payments, but it was unclear whether he used personal funds.
He argued the payments gave him basis in the firm so he could deduct its losses, but the Tax Court decided he was merely a guarantor.
Tinsley, TC Summ. Op. 2017-9