Dividing Property In Divorce Tax Traps – Part 9

(Part 9 is continuation of series, links to all parts are provided at end of this blog post. This valuable series on Dividing Property In Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.) 

d.Losses of S Corporations

Both passive and active owners of S Corporations can only deduct losses to the extent that they have basis in the stock of the S Corporation.[1] Generally, taxpayers acquire basis in S Corporation stock by receiving pass throughs of profits, making capital contributions, or making loans directly to the S Corporation.[2]

When the owners of S Corporation stock receive pass through losses that are in excess of their basis, such losses are carried over until the stockholders re-establish enough basis in the stock to deduct the loss in whole or in part.[3]

(1) S Corporation losses follow the stock.[1]

For transfers of S Corporation stock incident to a divorce after 2004, any concomitant losses escheat to the spouse obtaining or keeping the stock.

(2)Carry over losses following the stock are treated as if they were incurred by the S Corporation in the subsequent year.[1]

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