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Transfer from S-Corp (solo shareholder) negative shareholder's equity basis to reduce shareholder's loan balance?

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Level 2

 A new client:  S-Corp solo shareholder has a beginning negative shareholder's equity basis of ($60K) and a loan balance of $140K.   Can I transfer the negative basis balance to the loan?  (In prior years, the business losses & distributions were taken to the 1040 even though there was a negative equity balance. )

This year,  there is an ordinary gain of $10K but a potential 179 deduction of $25K.  Can I transfer $75K from the equity balance to the loan balance, so the SH can take the 179?

There was also a $30K distribution but I'm taking that as a shareholder principal payment.  So after all this, the ending equity basis would be $0 and the loan balance would be $35K  ($140K- $75 transfer -$30K principal payment).  

Am I doing this correctly?  

Thank you for your assistance!

P.S.   There is no basis calculation sheet attached to the prior year 1040 schedule E, so I'm assuming the basis on the K-1 is correct since it's one person and no transfers in the past.

 

 

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6 Replies 6
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Level 15

What's a negative stock balance?


ex-AllStar
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Level 12

What part of "distributions" were taken to the 1040?

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Level 2

I haven't taken any of the 2019 distributions to the 1040 yet.  I'm trying to determine if I can apply them to the shareholder's loan payable balance instead of as 'distributions'.

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Level 12

I'm a bit confused; did you Edit your original text?

 

"There was also a $30K distribution but I'm taking that as a shareholder principal payment. "

What is a Principal Payment? Did you mean Loan payment?

These perspectives are hard to follow as for who owes to whom. Was there Payroll? As a sole shareholder, you would not really make a loan To/From yourself. Has there been a Note Payable document with interest charged between any/either party?

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Level 2

Sorry, I didn't mean to be confusing.  

The S-Corp has one employee receiving W-2 income, who is also the sole shareholder.  He also took distributions from the business.  There is a negative equity beginning balance and a loan payable balance to the shareholder on the tax return from last year.

My understanding is that his 1040 distributions would be taxable if there is negative basis, and that also you can't take a loss to the 1040, when there is negative basis.  The loss should be suspended until the basis is out of the negative territory.  But since he had a loan, I wanted to transfer the negative basis to the loan and 'classify' the distributions as loan payments, resulting in basis being $0 and the loan balance being reduced.

Basically, I'm trying to wipe out the negative basis.

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Level 2

Negative shareholder's equity

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