If a shareholder does not have sufficient stock basis to deduct his or her share of an S corporation's losses and deductible items, what are the tax consequences?
A)The excess losses and deductions may be carried back 3 years and then forward up to 5 years to offset other income items of identical character.
B)The excess losses and deductions are suspended until the corporation's or shareholder's future activities generate sufficient new basis against which to deduct the losses
C)The excess losses and deductions may not be deducted at any time and can never provide tax benefit.
D)None of the above.

Question

Quizplus · Accepted Answer

The excess losses and deductions are suspended until the shareholder acquires additional basis in the S corporation, at which point the suspended losses and deductions can be utilized. This mechanism prevents the immediate deduction of losses that exceed the shareholder's investment in the corporation, ensuring that tax benefits are matched with the economic investment.

If a Shareholder Does Not Have Sufficient Stock Basis to Deduct