S-corp question

[Catherine]

Had an S-corp client call me today with a question I can't answer right off, and the first two places I looked didn't help, either. It should be plain and simple, but I'm just drawing a blank on this.

This is a small consulting company, only assets are about $9K in cash. Owes the shareholders (2) about $40K in loans made to company. They may close the company this year. They have an accrued pension liability of about $26K. Does it make any tax sense for them to loan the company money to pay off this liability? Would the unpaid, outstanding loan to the shareholders be considered a business loss -- or personal, nondeductible?

Please note that I'm ignoring the entire issue of how their SEP is structured and whether or not they _must_ make the contribution. That's a different issue from what happens to the loan to the company.

Thanks, all.

Catherine

[imjulier]

Catherine-

Here's my 2 cents:

If money is accrued for the SEP, the s corp should have taken that as a deduction on its tax return and therefore, they are required to put into the SEP. If they don't, the S corp return should be amended/filed to remove this expense and the related liability and the personal returns amended or filed accordingly. I assume it is for 2008 as you can't put into a SEP after the due date of the return. If it is from previous year's, I would amend that year's 1120S and personal returns accordingly. This would be the tax benefit of making the SEP contribution, if allowed.

As for the loan from the shareholders, it depends on what their basis is in the S corp. Recall that non-deductible expenses and losses affect basis so the loan may or may not be their basis in the company. If they have basis in the S corp and it is closed out, I would take that as a sch d loss....limited to $3,000 each year or to offset capital gains.

Hope this helps.

Julie

[Catherine]

Catherine-

Here's my 2 cents:

If money is accrued for the SEP, the s corp should have taken that as a deduction on its tax return and therefore, they are required to put into the SEP. If they don't, the S corp return should be amended/filed to remove this expense and the related liability and the personal returns amended or filed accordingly. I assume it is for 2008 as you can't put into a SEP after the due date of the return. If it is from previous year's, I would amend that year's 1120S and personal returns accordingly. This would be the tax benefit of making the SEP contribution, if allowed.

As for the loan from the shareholders, it depends on what their basis is in the S corp. Recall that non-deductible expenses and losses affect basis so the loan may or may not be their basis in the company. If they have basis in the S corp and it is closed out, I would take that as a sch d loss....limited to $3,000 each year or to offset capital gains.

Hope this helps.

Julie

Thanks, Julie -- Just what I was looking for.

Catherine