S Corp Basis Calculation for Losses When Affiliated Company Provides Loans

You're right to question this. When it comes to S Corp basis, the loans need to come directly from the shareholder to create debt basis. Loans from a related entity you own (but that isn't itself a shareholder) don't automatically create basis for you. To get basis from loans, you need what's called "direct indebtedness" - meaning the S Corp must owe the money directly to you as the shareholder. The IRS and Tax Court have consistently held that loans from a related entity don't count for the shareholder's basis, even if you own that entity. Your instinct about the proper approach is correct. You would need to either: 1. Have the money flow from your other company to you personally (as a distribution or loan), then you personally loan it to the S Corp, or 2. Have your other company loan you the money, and then you loan it to the S Corp. There needs to be proper documentation showing the S Corp is indebted to you personally. Without restructuring these transactions, you likely can't use these losses currently and they'll be suspended until you have sufficient basis.

After years of dealing with tax issues, I finally found a tool that helped me understand my S Corporation basis challenges. I was in a similar situation with loans between my business entities and unsure about how to calculate my basis correctly. After trying multiple accountants who gave conflicting advice, I discovered https://taxr.ai which analyzed my loan documentation and business structure to give me a clear answer about my specific basis situation. What impressed me was how it identified exactly what documents I needed to properly establish loan basis and explained the right structure to make sure my losses would be deductible going forward. The system showed me the relevant tax code sections and court cases that applied to my specific situation.

I was really skeptical about using an AI tool for something as complex as S Corp basis, but I decided to try https://taxr.ai after getting contradictory advice from two different accountants. I uploaded my documents showing the loans between my businesses, and it immediately flagged that my loan structure wouldn't create basis under the "direct indebtedness" requirement. The system actually provided me with templates to restructure the loans properly and showed me the court cases that would apply if I got audited. Following their recommendations, I was able to properly document new loans that established basis and allowed me to take the losses on my personal return. Honestly wish I'd found this before setting up the loans incorrectly in the first place - would have saved me thousands in unutilized losses.

After fighting with the IRS for months over an S Corp basis issue similar to yours, I was at my wit's end trying to get someone knowledgeable on the phone. My accountant suggested I try https://claimyr.com and shared this demo video: https://youtu.be/_kiP6q8DX5c. I was completely skeptical but desperate to talk to someone at the IRS who actually understood S Corporation basis rules. What shocked me was how quickly they got me through to an IRS representative who specialized in pass-through entities. Instead of the usual 2+ hour hold time (if I could even get through at all), I was talking to someone who could actually address my specific situation in under 20 minutes. The agent confirmed exactly what I needed to document the loans properly and how to handle the previous years where I had claimed losses without sufficient basis.

I owe an apology to profile 15 - I was completely wrong about Claimyr. After continuing to struggle with getting through to the IRS about my S Corp basis issue, I reluctantly tried the service. Within 45 minutes, I was connected with an IRS representative who actually specialized in S Corporation matters. The representative walked me through the exact requirements for establishing proper loan basis and confirmed that my current structure (with loans from an affiliated entity) wouldn't create basis for the shareholder. She even explained the specific documentation I would need if I restructured the loans to flow through me personally first. This single conversation saved me from potentially claiming improper losses that could have resulted in penalties and interest if audited. I'm now working with my accountant to properly restructure everything based on the guidance.

There's a specific court case that addresses exactly this situation - Ruckriegel v. Commissioner. The Tax Court ruled that when an S corporation shareholder arranged for a loan from another entity they controlled, rather than lending the money directly themselves, the shareholder did not obtain basis in the S corporation. You should also look up "back-to-back loans" which can sometimes work if properly structured and documented. This is where your other entity loans you the money personally, and then you immediately loan it to the S Corp. But the documentation must be meticulous with separate loan agreements, reasonable interest rates, and actual cash transfers between all parties.

I'm confused about something related - does an increase in basis from loans affect the ordering rules for distributions? I have S Corp operating losses but also took some distributions this year. Would properly structuring the loans as suggested here help with the distribution ordering rules?