Ref: Revenue Procedure 2018-33 (amplifying Rev Proc 2015-57)

When Corinthian Colleges, Inc closed, the Department of Education (ED) estimated that fifty thousand attending students had taken out loans.  American Career Institutes (ACI) was another for-profit college that closed with thousands attending.  The ED is in the process of discharging those student loans under its “Closed School” program.

The IRS has indicated that the students with these discharged loans won’t have cancellation-of-debt (COD) income on their returns.  Additionally, they won’t have to amend and repay prior education tax credits claimed or reverse education loan interest deducted.

Please call if you have further questions.

Here’s an example of the new pass-through deduction for a sole proprietor machine shop with no employees:

Service business: No (manufacturer/wholesaler)

Taxable income on his/her tax return using the new rules: $185,000

Filing status: Single

Net income of the machine shop: $215,000

Section 199A deduction: $19,350

Reference: Tax Cuts and Jobs Act of 2017

Example situation I: Married, total W2 $100,000. K-1 from a service-type S corporation shows net income $200,000 (the S corporation paid total wages to employees (including shareholder) of $100,000. The taxable income using 2018 federal regulations is $315,000.  Outcome: The pass-through deduction is $40,000.  If their effective rate is 20%, this has saved them $8,000 in federal tax.

Example situation II: Same as Situation I except household taxable income is $375,000.  Outcome: The pass-through deduction is $16,000. If their effective rate is 23%, this has saved them $3,680 in federal tax.   This is limited because the S corporation is a service-type business and their taxable household income exceeds $315,000.

Example situation III: Same as Situation II except the S-corporation is in retail sales (not a service-type business).  Outcome: The service business limitations don’t apply so the pass-through deduction is $40,000.

Ref: Hargis v. Koskinen, 2018 PTC 184 (8th Cir. 2018)

This case serves as a reminder that signing a loan with the S corporation as a co-borrower or guarantor doesn’t give the shareholder basis in the debt.  The lack of basis can keep you from using an S corporation loss on your individual tax returns.  If you are a shareholder in an S corporation running a loss and needing cash flow, you should:

1. Borrow money at the shareholder level and/or tap into personal (non-retirement) savings.
2. Lend the money to the S corporation yourself.
3. Draw up a note at the time you lend to the S corporation.
4. Be sure that the note is documented in the S corporation minutes.
5. Be sure that the S corporation pays interest at least annually and issues you a Form 1099-INT.

Call with questions.