Maximizing basis when guaranteeing an S corporation's debt

Article Abstract:

Shareholders of S corporations can claim deductions on pass-through losses for a given year only as far as their S corporation basis allows them to. The provisions of Section 1366(d) hold that this basis refers only to the shareholder's basis in S corporation stock and the shareholder's basis in S corporation debt owed to the shareholder in that tax year. This basis can be increased only if a shareholder adds new capital, makes profits or provides loans directly to the S corporation. Thus, shareholders need to carefully plan how to increase their basis if they wish to avoid having limits imposed on the amount of pass-through losses they can claim as deductions. This is particularly true of shareholders who have depleted their basis through deductions claimed in previous years, since they are required to carry forward losses that are disallowed by the IRS due to lack of basis.

S corporations

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Tax treatment of takeover expenses remains unresolved

Article Abstract:

The Supreme Court on Feb 26, 1992, ruled that the costs assumed by a target company in assessing a friendly takeover could not be considered deductible. The ruling, in the case involving INDOPCO Inc, does not cover costs assumed by a company in the event of a hostile takeover. However, the IRS may use the Supreme Court ruling as a basis to continue to apply the argument used in TAM 9144042 as a basis to deny the deductability of costs assumed by a target company during a hostile takeover. The Supreme Court ruling does not, however, change the tax treatment of the costs assumed by an acquiring company during an acquisition. Under Section 263, these costs are considered deductible if they meet certain requirements.

Acquisitions and mergers

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Structure pay to avoid reasonable compensation attack

Article Abstract:

Deduction of reasonable compensation for services rendered can be performed under Sec. 162(a)(1). However, the term 'reasonableness' is a very subjective concept. This being so, taxpayers may sometimes find that the IRS does not accept compensation deductions of closely held corporations that reward shareholder-employees attractive compensation and measly dividends. In these scenarios, the IRS considers the deductible compensation as nondeductible dividends. In light of this, taxpayers should be extra careful in arranging compensation packages and make sure that sufficient documentation is filed for future reference. Opinions rendered by the courts can be an effective guide for these companies.

Taxation, Compensation management

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