When done in a taxable account rather than in a tax-deferred retirement plan, this strategy provides immediate tax losses
, while deferring taxable gains."
Before recommending S status to allow the use of anticipated initial tax losses
, the tax adviser must verify that the shareholders have sufficient basis, via either direct investment in stock or direct loans to the S corporation.
Annual tax losses of $282,040 (0.02564 x $11,000,000) attributable to depreciation on the building are allocated 50% to each shareholder. Thus, after five years of operation, both X and Y will have an adjusted basis of zero in their stock, and each will have been allocated $705,100 of tax losses over the period.
This basis increase would support the deduction of previously suspended losses because tax attribute reduction, which applies to such suspended losses, is applied after the computation of the current year's tax. Hence, such a basis increase can be extremely valuable to shareholders of an S corporation holding a distressed property that generated significant tax losses in tax years prior to the COD, which shareholders were unable to deduct for lack of stock basis.
Thus, if he lacked basis to support the deemed distribution at the time the $2,420,519 debt was discharged, it was only because he had previously claimed deductions for those tax losses of the partnership, which had reduced his basis in his partnership interest.
On June 20, TEI submitted comments to Canadian Minister of Finance John Manley, urging the Canadian government to introduce a formal system to permit the sharing and utilization of tax losses
and other tax attributes among groups of related corporations.
On behalf of Tax Executives Institute (TEI), I am writing to urge the government to introduce a formal system to permit the sharing and utilization of tax losses and other tax attributes among groups of related corporations.
Specifically, the current informal ad hoc system for transferring and sharing tax losses among related Canadian companies requires companies to engage in various forms of corporate reorganizations.
In principle, TEI believes that taxpayers should be entitled to full tax refundability of their tax losses. In other words, each corporate entity in a group should be able to monetize the tax equivalent of the loss in the year incurred to the full extent of the taxes previously paid by that entity.
TEI believes taxpayers should be entitled to full refundability of their tax losses and other tax attributes.