S Corp Capital Gain

[KHWEBERCPA]

Client has a business (husband and wife are shareholders) sitting on a large piece of property.  The business has been struggling, and has accumulated losses of approximately $200,000.  An interested party wants to purchase part of the property, and selling it would generate approximately a $300,000 capital gain.

 

It appears to me that if client sells the property, they will have a  $300,000 capital gain which would pass through to the S Corporation shareholders, and the $200,000 of negative basis will continue to carry forward.

 

The client will need cash to pay the taxes on the capital gains.  Can the S Corp make a loan to the shareholders to cover the tax hit?  That would seem to be preferrable to paying a large bonus to the shareholders, that would only server to further increase the accumulated losses and negative basis.

 

Is my thinking correct?  Any comments or suggestions would be appreciated.

 

Ken Weber

Vancouver, WA

[Abby Normal]

First off, you can't have negative basis in an S corp. Basis stops at zero. What you probably have are 200k in suspended losses due to lack of basis. The good news is that the 300k gain in the s corp will increase basis, but they should only take 100K in distributions this year so they leave enough basis to take all of the suspended losses.

 

Is there any chance that they can utilize the 0% bracket for LTCG on their 1040?

[jklcpa]

I agree with jmdaviscpa. The gain in the S corp does increase basis, so as long as basis at the EOY is higher than the suspended losses, the individuals should be able to deduct those in the year the gain passes through.