How do I apply business losses to my personal tax return when closing my S Corp?

The good news is that S Corporation losses do indeed pass through to your personal tax return, even when the business is closing down. That's one of the benefits of the S Corp structure. When an S Corporation has a loss, it flows to the shareholders based on their ownership percentage via the K-1. These losses can offset other income on your personal return (like wages from a job, investment income, etc.) which is why your AGI has gone negative. There are a few limitations to be aware of: First, you need to have sufficient basis in your S Corp to claim the full loss. Basis is essentially what you've invested in or loaned to the company. Second, you need to have been materially participating in the business. Third, the passive activity loss rules might limit how much you can deduct in certain situations. If the loss is large enough that it exceeds all your other income (creating that negative AGI), you might have a Net Operating Loss (NOL). The rules for NOLs have changed in recent years - currently, you can't carry them back but you can carry them forward indefinitely to offset future income.

I went through something similar last year with my failed startup (also an S Corp). After spending hours trying to understand the IRS rules, I finally used https://taxr.ai to analyze all my business closing documents. Uploaded my K-1 and previous tax returns, and it explained exactly how the loss carryforward would work for my situation. The tool specifically identified that I had basis limitations I wasn't aware of (from previous distributions), which would have caused big problems if I claimed the full loss. It also created documentation showing how the losses should be calculated correctly.

I want to follow up about my experience with taxr.ai after my skeptical question. I decided to try it since my accountant was charging me $350/hour for questions about my retail store closure. The platform actually identified a significant error in how my losses were being calculated. Turns out I had overlooked some business debt that increased my basis, meaning I could claim about $16K more in losses than my initial calculations showed. The documentation was detailed enough that I could show it to my tax preparer, who agreed with the analysis. What impressed me most was how it explained the multiple-year impact of the loss carryforward. Showed me exactly how much tax benefit I'd get each year based on my projected income. Definitely worth checking out if you're dealing with a business closure.

When my manufacturing business closed in 2022, I had similar questions and couldn't get through to the IRS for weeks. Finally found https://claimyr.com which got me connected to an actual IRS agent in less than an hour. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent cleared up my confusion about loss carryforwards and confirmed I was calculating my basis correctly. They even sent me specific documentation about S Corp closures that I needed for my records. Saved me from potentially making a $22K mistake on my return.

I need to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself since I was desperate to resolve an issue with my business closing paperwork. Within 45 minutes, I was speaking with an actual IRS business tax specialist who confirmed my identity through their normal verification process. She accessed my business tax history and explained exactly how to handle my S Corp loss carryforward situation. The agent spent almost 30 minutes going through my specific situation, explaining how the at-risk rules and basis limitations would affect my ability to claim losses. She even emailed me specific IRS documentation for business closures. Definitely wasn't generic advice - she referenced specific details from my previous returns. Honestly wish I had known about this service months ago instead of wasting dozens of hours on hold.

One thing nobody's mentioned yet - make sure you also check your state tax implications for the S Corp loss. Some states don't fully conform to federal S Corp treatment, so you might have different rules for how those losses flow through on your state return. I'm in California and when I closed my S Corp, I was surprised to find their treatment of the losses was different than federal. Ended up having to pay more state tax than I expected because they limited some of the loss deductions.

Has anyone here dealt with inventory write-offs as part of closing their S Corp? We're struggling to figure out how to properly account for about $35k of remaining inventory that we can't sell at anywhere near full value.

I'm sorry to hear about your business closure - it's never easy to make that decision after 7 years of hard work. The silver lining is that S Corp losses do provide significant tax benefits when you're shutting down. One important thing to double-check with your accountant when they return is whether you have any outstanding loans to the S Corp. If you personally loaned money to the business over the years (which many small business owners do), those loans actually increase your basis, potentially allowing you to claim more losses than you might initially think. Also, since you mentioned supply chain issues and rising rent, make sure all final business expenses related to the closure (lease termination fees, final inventory markdowns, professional fees for closing, etc.) are properly captured in that final year return. These expenses can add to your deductible loss. The fact that your AGI went negative isn't necessarily a bad thing - it just means you'll have a Net Operating Loss to carry forward, which can provide tax savings for years to come as your income recovers.