Personal Guarantee of Corporate Debt Does NOT Add to Basis (Investment) - John R. Dundon II, Enrolled Agent
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Personal Guarantee of Corporate Debt Does NOT Add to Basis (Investment)

Personal Guarantee of Corporate Debt Does NOT Add to Basis (Investment)

Taxpayers who own shares in an S corporation are allowed pass-through losses to the extent of their basis (also commonly referred to as investment) under §1366(d) in their entity. Shareholders can obtain basis in a variety of ways such as direct investment, loaning the corporation money, contributing capital etc. However sharholders of S Corporations do not gain basis by personally guaranteeing debts of the corporation.

In Spencer v. Commissioner, 110 TC 62, TC Memo 2010-55, the Court ruled that mere shareholder guaranties of S corporation indebtedness generally fail to satisfy the requirements of §1366(d)(1)(B) because there is no economic outlay or direct indebtedness between the corporation and its shareholders. In other words no form of indirect borrowing, including personal guaranties, gives rise to indebtedness from the corporation to the shareholder unless the shareholder pays part or all of the obligation.  As such there is no increase in basis by personally guaranteeing a debt for the Sub-chapter S Corporation that you own, if you own one.



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