S corporation owners who guarantee the firm’s loans don’t get a tax break: Guarantees don’t boost their tax basis in the firm.
S company shareholders can deduct their share of corporate losses only up to their investment in the company, including advances made to the firm.
After an S corporation defaulted on bank loans, the lenders got legal judgments against the shareholders who guaranteed the debt and filed liens against their personal assets.
The owners haven’t paid the amounts. Their tax basis in the company doesn’t increase until they actually make a cash outlay to pay off the judgment, according to the Tax Court .
Phillips, TC Memo. 2017-61
S owners can avoid this problem by borrowing the funds themselves and then lending them to the corporation. That will increase their tax basis in the company, which then allows them to deduct a larger share of the losses.