Page 226 - TaxAdviser_Jan_Apr23_Neat

CASE STUDY
Editor:
Shaun M. Hunley, J.D., LL.M.
Shareholder basis
and other applicable
loss limitations must
be applied in a
specified order, with
differing rules.
This case study has been adapted from
Checkpoint Tax Planning and Advisory
Guide’s S Corporations topic. Published
by Thomson Reuters, Carrollton,
Texas, 2023 (800-431-9025;
tax.thomsonreuters.com).
46 April 2023
Interaction of S shareholders’
loss limitations
Losses passed through to S shareholders savings and $4,000 that he borrowed
are limited by the various loss limitation from R, a 25% shareholder in the
provisions in the following order (Temp. company.) P, who does not materi-
Regs. Sec. 1.469-2T(d)(6)): ally participate in the company’s
1. Basis limitations (Sec. 1366(d)(1)); operations, is allocated an $11,000
2. The at-risk rules (Sec. 465(a)(1)); passthrough loss at the end of the
3. The passive activity loss (PAL) rules first year. He does not receive passive
(Sec. 469(a)(1)); and income from any other source.
4. For tax years beginning after 2020
and before 2029, the excess business P’s basis limitation restricts his
loss limitation (Sec. 461(l)). deductible loss to $10,000. The at-risk
Law change: Enacted on Aug. 16, rules then limit his deductible loss to
2022, the Inflation Reduction Act of $6,000 (the amount not borrowed from
2022, P.L. 117-169, extended the effec- a person who has an interest in the
tive date of the Sec. 461(l) excess busi-
company). The PAL rules reduce his
ness loss limitation by two years. Prior to deductible loss to zero. Thus, his entire
the Inflation Reduction Act’s enactment, $11,000 first-year loss will be suspended
the excess business loss limitation ap-
and carried over as follows: $1,000 under
plied to tax years beginning after 2020 the basis limitation rules, $4,000 under
and before 2027. Section 13903(b)(1) of the at-risk rules, and $6,000 under the
the Inflation Reduction Act extended PAL rules.
the effective date to apply to tax years
beginning before 2029. Increasing at-risk basis by gain
The at-risk rules apply only to indi- from stock disposition
viduals and closely held C corporations, Gain from the disposition of stock
meaning that the limits are imposed increases at-risk basis, allowing
at the shareholder level in the case of shareholders to use all or part of their
an S corporation. The excess business losses that have been deferred under
loss limitation also applies at the share- the at-risk rules. Similarly, a taxable
holder level. disposition of stock in a passive activ-
ity to an unrelated party allows the
Example 1: Calculating deductible use of any PALs from the activity that
losses under the basis, at-risk, and may have been previously suspended PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
PAL limitation rules: P invests cash because of insufficient passive activity
of $10,000 in exchange for 15% of income. However, gain on the sale of S
the stock of a new S corporation corporation stock does not affect stock
that raises cattle. (The $10,000 is or debt basis. Thus, losses suspended
made up of $6,000 from P’s personal because of a lack of basis expire and are
The Tax Adviser