Legal Question in Business Law in New Jersey

Re: Sub chapter S corporations

Losses can pass through, provided the stockholder still has stock basis. For example, if the stockholder paid $5,000 for his stock, his basis is $5,000. Assume 2 years of profits aggregating $10,000, with distributions actually paid out of $8,000. On the books, he would have an additional $2,000 (probably reported as a loan to the corporation) which could be used to increase his stock basis to $7,000. If the corporation experienced an $8,000 loss, he could only pass-through $7,000. The remaining $1,000 cannot be used until he attains new basis. Debts and liens of the corporation do not become stockholder responsibility unless the stockholder personally guarantees them.

Re: Sub chapter S corporations

Legitimate losses incurred by an S corporation are deductible by the shareholders on their personal tax returns under federal law. However, corporate debts and liens are those solely of the corporation, unless the officers of the corporation were required to give personal guarantees, as is often the case with small corporations. I strongly suggest you consult with your tax preparer on these kinds of issues.