July 4th, 2009
Can a C corp that buys a 30% interest in my S corp take advantage of
my tax loss carry forwards?Hello and thank you for your question.
Financeguy-ga's comment is correct. An S corp does not have tax loss
carryforwards, because its gains and losses are taxed in each year to
its shareholders, and also, adding a C corp as an S corp shareholder
will terminate the S election.
"A corporation may not carry a capital loss from or to a year in which
it operates as a Subchapter S Corporation."
IRS Frequently Asked Questions
http://www.irs.gov/faqs/page/0,,id%3D15793,00.html
"An S Corporation generally passes gains and losses through to the
shareholders based on their percentage of ownership (distributive
share). For more information on how to calculate and report these
losses, see Instructions for Form 1120S, Schedule K-1, Form 4797
(PDF), Sales of a Business, Form 1120S (PDF), U.S. Income Tax Return
for an S Corporation, Entities: Sole Proprietorship, Limited Liability
Company/Partnershp (LLC/LLP, Corporation, Subchapter S Corporation."
Id., citing
http://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
http://www.irs.gov/pub/irs-pdf/f4797.pdf
http://www.irs.gov/pub/irs-pdf/f1120s.pdf
Selling an interest in your S corp. to a C corp. will trigger the
termination of your S election, because C corps do not qualify to own
stock in an S corp:
"A corporation may elect to be an S corporation only if it meets all
of the following tests:
....
Its only shareholders are individuals, estates, exempt organizations
described in section 401(a) or 501(c)(3), or certain trusts described
in section 1361(c)(2)(A)."
Election by a Small Business Corporation
http://www.irs.gov/formspubs/page/0,,id%3D10473,00.html
Financeguy-ga's second comment is interesting, but as he notes the
acquiring company still won't be able to take the losses.
Search terms used:
"subchapter s" site:irs.gov
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Sincerely,
Google Answers Researcher
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