S corp- Ordinary loss deductability

[mircpa]

Hello all

S corp tax client purchased business assets work 50K with bank loan. Due to special depreciation rules all 50K is depreciated & shows up as ordinary loss. Stock & debt basis is 0. All 50K is ordinary loss but cannot claim due to 0 basis. He is planning to sell business next year. I was wondering how to handle 50K b'coz next year it might turn back & depreciation recapture will become ordinary income. Losses on form 6198 carryover this amount to 2019. Does next year's positive ordinary income knocks off this ordinary loss from prior year  or do taxpayer gets to knock off this amount on Sch D as adjustment if in case assets sold ?

Thanks

[Lee B]

9 minutes ago, mircpa said:

Hello all

S corp tax client purchased business assets work 50K with bank loan. Due to special depreciation rules all 50K is depreciated & shows up as ordinary loss. Stock & debt basis is 0. All 50K is ordinary loss but cannot claim due to 0 basis. 

Thanks

1. You have condensed the details to the point that it's unclear as to what the actual situation is ?

2. Who did the bank loan the money to ?

[mircpa]

Bank loaned money to corporation & owner shareholder is not personally liable for repayment.

[Abby Normal]

I've never needed to use the 6198 for S corp losses to be carried over. The basis worksheet handles that just fine.

Carried over losses will offset future income or can be used if the shareholder makes capital contributions. They will also be allowed when the entire entity is disposed of.

[DANRVAN]

1 hour ago, Abby Normal said:

They will also be allowed when the entire entity is disposed of.

Only to the extent of basis.  Otherwise permanently disallowed since the share holder was never at risk for the amount.

See reg 1.1336-2(b)(2). 

[mircpa]

OK. Its clear I will go with basis limitation worksheet not 6198. My question is since it is showing 50K ordinary loss in current year which cannot be deducted because 0 basis. Does taxpayer gets to offset 50K losses with next year's ordinary income (in case it has ordinary income greater than 50K) ?

My worry is if this business is sold next year whole amount 50K would show up in ordinary income (depreciation recapture) from capital gain.

Thanks to all who responded.

[DANRVAN]

The ordinary loss c/f will offset ordinary income next year.

When assets are sold ordinary gain will be recognized up to the amount of depreciation taken.

9 minutes ago, mircpa said:

My worry is if this business is sold next year

You are talking about selling assets vs stock?

[DANRVAN]

32 minutes ago, DANRVAN said:

See reg 1.1336-2(b)(2). 

That should be 1.1366-2(b)(2)

[Mario]

Why not just take minimum depreciation instead of bonus?

Mario