Basis Is an Issue for S Corporation Owners

Losses passed through to an owner are deductible only to the extent of his or her basis in stock as well as loans that the owner has made to the corporation. A very successful real estate developer found out the hard way about this rule. The Tax Court denied him a deduction because he couldn’t demonstrate his basis in indebtedness. His activities were conducted through multiple entities, with money going back and forth. This made it impossible to determine his basis in indebtedness to the S corporation that generated the loss he was trying to deduct.