Basis and Carryover Expenses
In 2006, our S-Corp generated 150K in revenue and 200K in expenses leaving us with a 50K loss (and a 50K debt to a line of credit).
In 2007, our S-Corp generated 130K in revenue and 108K in expenses leaving us with a $22K gain. The 22K gain is composed of principal payments to the line of credit, and we still owe $35K on the line of credit going into 2008.
From a tax perspective, the three majority shareholders (33% each) wrote off $17K each in 2006 ($50K div by 3). (We each initially contributed $4,500 for our 33% share.)
In 2007, most of our income went to paying contractors, and the money we had left over ($22K) went to pay off our debt. However, TurboTax (and Quickbooks) says that each partner is responsible for $9500 in gains, offset by $2200 in Section 179 expense, or about $7300 each.
The rub is that each of us put all of our income into debt reduction, yet each of our personal taxes just increased (flow through in K-1). Does this sound right? Did I miss a classification bucket somewhere?
An accounting friend said that we should not have written off $17K in 2006 because we should have carried the expenses over and deducted those expenses against the 2007 net income.
What are the mechanics of this?
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Yes, the LOC was backed by
Yes, the LOC was backed by all 3 of the partners equally.
So, it sounds like it doesn't matter whether we took the deduction in 2006 or 2007, we've got to take the hit eventually, though it might have been better to carryover than to take the 17K deduction in 2006.
Affect of Debt on Shareholder Basis
Hi
What is the nature of the Line of Credit? If the LOC is in the business name & none of the shareholders personally backed the loan, then your accounting friend is partially correct. You can deduct only $4500 of the 2006 loss. The remaining $12167 is disallowed and carried forward to 2007. In 2007 you report S corp income of $9833 (22000-12167) which is also the ending basis for 2007.
$ 0 2006 Beginning Basis
+$ 4500 2006 Contributions
-$ 4500 2006 Allowed Loss
-------
$ 0 2006 Ending Basis
-$12167 2006 Disallowed Loss Carryforward
$ 0 2007 Beginning Basis
+$22000 2007 Income
-$12167 2006 Disallowed Loss Carryforward
-------
$ 9833 2007 Ending Basis
Now, if the LOC was personally backed by one or more of the shareholders then the amount of the loan increases the shareholders' basis and you can take the full $17K loss in 2006.
Does this answer your question?
L:)