In later years, any net increase in basis for
the year first restores the shareholder's debt basis
up to the outstanding debt amount, and then the shareholder's stock basis.
If the S corporation settles the loan from the shareholder before the shareholder's
debt basis is restored, any loan repayment in excess of the shareholder's
debt basis triggers a taxable gain to the shareholder.
Second, the at-risk limitation provides that losses that
are deductible under the basis limitation are deductible only to the extent
the S corporation shareholder is at-risk in the corporation.
In general, the at-risk amount is the sum of the shareholder's stock and debt basis.
However, recall that in the case of non-recourse debt, risk of loss for
the debt is born by the lender.
Thus, the at-risk limitation, which is detailed in section 465,
has an important exception for non-recourse debt to help ensure that
shareholders are only deemed at-risk when the risk of personal loss exists.
Specifically, S corporation shareholders using non-recourse
debt to make capital contributions to the S corporation
creates stock basis in the S corporation because of the contribution.
But such debt only increases the at-risk amount by the net fair market value of any
property used as collateral to secure the non-recourse debt.
If shareholders use non-recourse debt to make a loan to the S corporation,
the loan creates debt basis, but only increases the amount at-risk by the net
fair market value of any property used as collateral to secure the loan.
As before, losses limited by the at-risk amount are carried forward indefinitely
until the shareholder generates additional at-risk amounts or sells the stock.