Two "s" corporations. One fails. Can the loss of one help the other on an 1120s return?

Question

If you own two "s" corporations and one has been in business for years and the other fails can the loss of that second corporation be listed on the 1120s form of the profitable, still in business, one? If so - what line does that loss go on?

Answer 1

First, I don't have web references to point to. I have personally owned 2 S corporations and 2 LLC's and have had to work through the same issue. My experience in this is what I"m basing this answer on.

I'm assuming two things:
1. That the two S corporations have no cross-ownership between them
2. That you are a shareholder in both

If those are not true, we'd have to modify some of my comments a bit and I"ll try and point out where.

Before I comment, get to your accountant and if you don't have one, it's time to get a good one. I have a great accountant and this is the kind of strategy he can help me with.

That said, as an S corp, you will have to file seperate 1120s forms; one for each corporation. As a shareholder in both, you will receive a K-1 from each corporation. From THIS perspective, the loss of one MAY help you on the other, but more importantly, the loss of one can help YOU in your personal tax return. It's one of the key reasons to form an S versus C corp; to have avoid double taxation and have the performance of the corp flow to your personal income tax for benefit.

A couple of things to consider:

. For the loss of one corporation to apply to the other they both have to have the same level of activity. If you are only a passive investor in one but are active in the other, then the performance of one can't help you on the other.
But, that doesn't necessarily have to matter when it comes to your personal return; it's just easier to take advantage.

Let me present two quick scenarios and keep in mind the, BENEFIT you receive isn't based on the 1120's but on the K-1's you recieve personally and the level of activity.

Scenario 1: You are Active in BOTH companies, i.e. you are NOT a passive investor in each:

In this scenario you receive 2 K-1's; one from each corporation. You are actively a part of BOTH companies having a management or employee role. For Grins, you have a 50% ownership in the company (base this on what you really have) The 1120s for Company A shows a net profit of $20,000. Your K-1 for Company A will be for $10,000 (50% ownership, the profits flow to you based on your % of ownership). Similarly, you have the same role and same ownership in Company B (again, you'll know the real answer). The 1120s for Company B shows a loss for $40,000. Your K-1 for Company B will be for a LOSS of $20,000. Based on this, when you file your Personal income Tax, your K-1's will Offset as Follows:

Company A - $10,000 Profit
Company B - ($ 20,000) Loss
Equals $ 0 Profit (offsets) and a ($10,000) active Loss Carry Forward (which can be used for other losses that are active.)
Here's a second benefit. If you have an investment that you ACTIVELY manage, like a stock account or your own mutual fund account you actively manage and trade, you can use any portion of the $10,000 LOSS carry forward against any profits you may have in those accounts So, if you had a bad mutual fund year and had to take some of the money out to pay for the kids school and it resulted in a net profit of $5,000. You can basically avoid paying the tax on that gain (18% of $5,000 provided you've held the investment for at least 2 years) by applying $5,000 of the loss carry foward leaving you $5,000 for any future gain.

Scenario 2: You are Active in One Company but Passive (Silent investor) in the second.

In this scenario you receive 2 K-1's; one from each corporation. You are Active in Company A and own 50% and you are Passive in Company B and own a less than majority, 25% in this company. The 1120s for Company A shows a net profit of $20,000. Your K-1 for Company A will be for $10,000 The 1120s for Company B shows a loss for $40,000. Your K-1 for Company B will be for a LOSS of $10,000 (as you own 25%). Because you have a mix of activity, a passive loss CANNOT offset an active gain. So, your personal tax form would do the following:

Company A - $10,000 Profit, i.e. Increase in personal income

Company B - $10,000 Loss carry forward for the passive investment
Note that they do not offset.

Now, let's say you also have a passive personal investment. You have invested in a real estate investment that someone else manages (like an apartment building or a REIT (Real Estate Investment Trust) that is not exchange traded). And for grins, let's say your trust appreciated and that you receive a 1099-Div form from the REIT for a $5,000 divident for the year. Well, guess what. Just like before, you can now apply the PASSIVE LOSS ($10,000 passive loss carry forward) to the $5,000 dividend you receive because it is a PASSIVE gain.

Do you see how it is working. Active to Active and Passive to Passive. So, you need make sure with the 2 S Corps that you are either both active or not. If you are active in both, then you most certainly will be able to offset the gain of one with the loss of the other. That's why you need a strong accountant... they make that stuff happen.

One last example in my case. I had a small consulting company that I used for side work. When I set the company up, I added my wife in the company and did a 60/40 split of ownership with her being 40% and passive (I ran the company, I got my work, I did the work, I billed my work and I got paid). She was part mainly because of the need for 2 investors to do an S corp., etc.

At the same time, we owned a couple of houses in the Smokey Mountains as rental properties that were managed by a rental management company.

One year, I did $45,000 of income in side work against this company (it was a good year ;-) ). I hadn't paid any estimated tax along the way and frankly was a little concerned I might get soaked. My personal tax rate federal was already at over 28% and combined with state, local, federal etc... I was about 50%. So, I was staring a big tax gap.

At the same time, we were losing money on paper with the houses thanks to depreciation etc.

My accountant was able to justify taking a portion (40%) of my net income on my consulting company (about $42,000) passive to my wife ($42k*.4 = $16,800) and offset it with an equal portion of the passive loss on one of our homes equalling $16,800. That left $26,800 to me. I also had some active investments that had losses against them that helped offset the $26,800. The net was that I paid about $6,000 of total tax against the original $45,000 or about 15%. a far cry from the 50% I was looking at.

Hope this helps.

Cheers,

TBG.

Answer 2

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Answer 3

Each S Corp exists on its own level. You should get a K-1 for each at the end of the year. The form K-1 for each goes on your 1040 Sch E; where any loss for one is taken from any gain for the other.

Answer 4

It depends...
Does an individual own 2) S-Corps?
OR
Does and individual own 1) S-Corp and the S-Corp own another S-Corp?
The second situation is yes, in the first situation, the profits & losses are netted on the 1040.

Answer 5

Sory i don't know the answer but you just answered one of my questions, so i have another queastion, Is it really difficult to become a psychiatrist?