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Proper reporting of S corporation indebtedness

The single taxation provision afforded to S corporations and their shareholders is one of the benefits of owning S corporation stock (instead of C corporation stock). Single taxation is made possible by treating an S corporation as a conduit that passes through income, losses, and deductions to the shareholders in pro rata to their stock ownership. Income, losses, and deductions that are passed through to each shareholder are included in the shareholder's gross income (with some exceptions) and increase or decrease the shareholder's tax basis in the S corporation stock (Internal Revenue Code Sections 1366 and 1367). The mechanism created by Internal Revenue Code (IRC) Sections 1366 and 1367 ensures that S corporation income is taxed only once. It also ensures that the shareholder has sufficient tax basis to take the loss deductions.

Unlike partners in a partnership, shareholders of an S corporation may acquire tax bases in the S corporation indebtedness only to the extent of their loans made directly to the corporation (IRC Section 1367(b)(2)(A)). Therefore, proper reporting of S corporation indebtedness on the balance sheet is essential to avoid unnecessary income tax examinations.

S corporations must report all loans received directly from shareholders on line 18 of Schedule L of Form 100S to properly reflect such loans.