I started an LLC in August of 2013 that focuses on residential real estate flipping. I purchased the first house and have completed the renovations. I have plenty of expenses including the cost of the house but since it has not sold yet I'm wondering how I should be reporting this year's tax. My plan is to report as an S corporation and pass everything on to me (as the sole proprietor). My hope was that it would have sold this year so that I could neatly just pay on the profit.
So what I have been like this (hypothetically), 55K in expenses for CY 2013 and no income. If I write off all these expenses as losses and then pass that through to my personal income (using an S Corp designation) I would be set up nicely this year but next year when the house sells I'll be on the hook for the entire sale price as a income since I would have nothing to write off against it (or at least that's my understanding).
So the question is, am I forced to report the loss this year or can it be deferred to next year ?
Any insight would be appreciated!
Answer :
In general, you need to report the losses on your 2013 return, NOT on your 2014 return.However, assuming you actively participate in the operation of your S corp and you're not merely a passive investor and sufficient basis in AAA acct.not neg balance in AAAacct.then, if your S corp suffers a loss in the tax year of 2013 you can deduct your share of the loss against your other sources of income, such as dividends, interest, your spouse's wages, etc.say,you own a 100% interest in your S corp. Your S corp suffered a biz related loss of $55k in 2013, then. you have a part-time job from which you earned , say,$20k. You also earned , say,$1k in interest and received a dividend of $1k on stock you own.Your total income from your job, interest, and dividend is $22k. You can deduct the $22k of the $55k loss from your $22k income not from the S corp.you can also deduct the remaining $35k as long as youhave sufficient balance in AAA acct.so,You can only deduct an S corp loss if you have a sufficient tax basis.also youdo not need to issue a w2 to yourself as the corp took looses in 2013.
Note;as you can see, an S corp is a business structure that allows its investors to claim earnings and losses on their personal income tax returns. Before you enter losses reported on a K-1 schedule from an S corp into your personal tax return on 1040, you must be sure you have enough basis as a shareholder to claim the losses. So, knowing how to determine your basis and how the current year's increases and decreases affect it will tell you whether you can claim all or part of the losses or whether they are suspended. you can only deduct losses of the S-Corp against ordinary income to the extent you have basis in the S-Corp.Anything above that is considered a capital loss. It's probably long-term capital loss so it's subject to the $3k per year limit with any amount you can't deduct this year carried forward to future years. If you do that and get a negative number for AGI on line 37 of 1040, then you could have a Net Operating Loss. with NOLs you want someone, a cpa/ an irsea in your local area, who knows what they're doing. And be prepared for your professional to charge more than an average return as it will be a lot of work for him/her. You need report on your 1040 the appropriate amount from your K-1 from the S-Corp. (as said, unless you don't have sufficient basis, then you will need to carry it forward to 2011). The basic rules for using an NOL are: you need to carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver. Also you may carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years. After 20 years, any remaining NOL is cancelled.
It makes financial sense to apply the NOL against the earliest periods possible, since the time value of money dictates that the tax savings in these periods is more valuable than for any tax savings in later periods.
If NOLs are being generated in multiple years, use them in the order the NOLs were generated. This means that the earliest NOL should be completely drawn down before the next oldest NOL is accessed. This approach reduces the risk that an NOL will be terminated by the 20-year rule noted earlier.
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