Contribute IRA funds to Charity

If you operate a business as an S corporation, you may be able to claim a valuable tax loss against your other income.  But the tax law generally limits such losses to the amount of your basis in the stock, plus any outstanding loans made by you to the S Corp.

Strategy: Arrange a capital contribution.  You’ll increase your adjusted basis and give yourself more “breathing room” to absorb losses passed through from the corporation to you.

This depends in part on your personal liquidity, but it could be a smart midyear tax move.

Here’s the whole story:  As an S Corp owner, all the income and expenses of the business are passed through to shareholders.  You’re responsible for reporting the appropriate share of income and deduction items on your personal tax return.

Depending on the situation, your corporation might benefit from a fresh influx of capital.  To determine how much of a capital contribution or loan to make to the S Corp, take a quick look at where you stand.  The middle of the year is often a good time to do this.

Key Point:  the money must come out of your own pocket.  For instance, you can’t trigger losses by arranging a loan to the S corporation from a third party.  The IRS and the courts have consistently denied losses for third-party loans, even if you personally guarantee them.

On the flip side, a tax loss might be more valuable to you in the future if you expect this to be a low-tax year.  Any nondeductible loss due to the basis limitation can be carried forward indefinitely until you have sufficient basis to absorb it.

Small Business Tax Strategies (August 2018)