Best way to structure corporate loss for maximum tax benefit

[araknis]

What is the name of your state (only U.S. law)? CA
Background: My Aunt owns a company that is losing about 75k a year. This company is a S-Corp and she is the sole shareholder. There are 6 more months on her lease, but she plans on closing her company by the end of the year to save on overhead costs (revenue cannot even cover payroll). In the meantime, she will continue to pay the rent for the remainder of lease and continue to add to the business loss.

She is suggesting that I should take advantage the loss somehow since her tax liability is already quite low. If she adds me as a shareholder (I would be an advisor for her), I could take a share of the loss on my personal income tax.

Does this plan make sense? Is there a better way to structure this so I could benefit from her company loss? Thanks.

 

[FlyingRon]

No, she can't just "gift" you the loss.
You have to have basis (paid something for your stock) in order to deduct it.

 

[LdiJ]

What is the name of your state (only U.S. law)? CA
Background: My Aunt owns a company that is losing about 75k a year. This company is a S-Corp and she is the sole shareholder. There are 6 more months on her lease, but she plans on closing her company by the end of the year to save on overhead costs (revenue cannot even cover payroll). In the meantime, she will continue to pay the rent for the remainder of lease and continue to add to the business loss.

She is suggesting that I should take advantage the loss somehow since her tax liability is already quite low. If she adds me as a shareholder (I would be an advisor for her), I could take a share of the loss on my personal income tax.

Does this plan make sense? Is there a better way to structure this so I could benefit from her company loss? Thanks.

No, it doesn't make sense. In order to take a loss from an S-Corp you must have "basis" in the business. You must have made an investment in the business, using after tax money or assets. You would have no basis in the business therefore you would not be eligible to take a loss.

If she gifted you some of her specific shares, then you would have her basis in those shares, but since she is closing the business that gets tricky in all kinds of ways that could cause issues....particularly if she has already run out her basis with past losses.

 

[araknis]

Thanks for the replies. So it sounds like there is no way for me to take advantage of the situation. Is there any other ways to structure this so she or I can get more tax benefits?

 

[araknis]

So my aunt is now thinking about dissolving the S-Corp and then forming a LLC to include me and just taking the loss on the rent payments for the remainder of the lease term. Would this method work?

 

[LdiJ]

So my aunt is now thinking about dissolving the S-Corp and then forming a LLC to include me and just taking the loss on the rent payments for the remainder of the lease term. Would this method work?

No, because you would have the same basis problem with an LLC.

 

[FlyingRon]

Besides even if you could invent some way to transfer the loss to you, it would be a passive activity and unless you've got some other passive income, you'd not be able to deduct it.

 

[HappyWanderer]

Wouldn't the passive activity be disposed in a fully taxable transaction if it went BK?