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Dear Tax Talk,
In 2007 I sold an S corporation business with $97,000 of debt for $35,000, therefore leaving me with a $62,000
business loss. Out of the $97,000 debt, $70,000 is a shareholder loan from me and one other person. The balance
is credit card debt.
I received $15,000 of the purchase price in 2007 with the balance to be paid over the next couple
of years. Also, for the last two years, I did not draw an income from the business. Can I then also add my would-be
salary to the total business loss?
What is the best way to recoup my
business loss? And can I or should I report the
full $35,000 as part of the 2007 business income
for tax benefits?
-- Sonya
Dear Sonya,
You're confusing your debt with your losses. As the S corp borrowed money and paid expenses, it acquired assets
and incurred deductions. These losses should have been reported on Schedule K-1, and depending on your basis in
the S corp, you may have already deducted some of the items.
The inability of the S corp to repay these debts does not increase your losses. Your repayment of
the debts in which you previously did not have basis increases your basis, and may increase the losses allowed to
you. For example, assume the balance sheet of the S corp prior to the sale looked as follows:
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Balance sheet example |
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| $35,000 |
$60,000 |
|
|
$10,000 |
|
|
($35,000) |
| $35,000 |
|
$35,000 |
Based on this example, you've personally funded $60,000 and the company has had $35,000 in losses,
which presumably you have deducted on your individual tax return. Assuming you have to repay the $10,000 for the
credit cards, you've funded $70,000, claimed $35,000 in losses and will be repaid $35,000 from the sale. You will
have no other gain or loss to report.
Your foregone salary is not an additional income tax deduction. The value of your services is
not deductible.
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