Properly Structuring S-Corp Shareholder Loans

By Kenneth H. Bridges, CPA, PFS March 2020

An S-corp shareholder’s ability to deduct for income tax purposes K-1 losses from the S-corp is limited to his or her “basis” in the S-corp.  “Basis” for these purposes is the amount the shareholder paid for his or her shares, plus capital contributions to the company, loans made to the company by the shareholder and K-1 income, minus K-1 losses and distributions.

So, can an S-corp shareholder include in his S-corp basis loans made to the S-corp by another company he owns, since, in substance, that is the same as his having made the loan himself?  No, according to the Tax Court and the Ninth Circuit Court of Appeals.  In the recent Messina and Kirkland cases, the courts ruled that the S-corp shareholder must make the loans directly in order to obtain basis in the S-corp.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.