If I’m short of fully recouping an initial business investment in a company that is closing, can I write off that amount on my personal tax return?

Jan 04, 2019

I invested $20,000 into starting a business a few years ago (with someone else), and set it up as an LLC filing as an S corporation. I've been slowly paying that initial investment back (from biz back to me). We are closing the business at the end of this year, and I'm still short of fully recouping the initial investment by $5,000. Am I able to write off that $5,000 on my personal tax return (where I normally claim the annual biz profit or losses)? Or is it just lost money?

Owners of an S Corporation need to keep track of the “basis” of their investment to determine how to report income, gains, and losses on their personal tax returns. Your initial investment and subsequent repayments to yourself are not the only components of the “basis” calculation. This can be a rather complicated area, so I would recommend consulting with a CPA on your specific situation. You should also check with the preparer of the S corporation tax return, as they may have maintained schedules on the basis of the investments for each owner. The IRS provides guidance on calculating the basis for your ownership investment. 

After determining your basis at the date of filing the final S Corporation tax return, you would compare that to any proceeds you received from the sale or liquidation of the company to determine whether you have a gain or loss. This could also include assets that are distributed to you in addition to cash, so this is another area you should review with a CPA.

If the character of your gain or loss is deemed to be capital, it would be reported as a Schedule D transaction on your Form 1040. It would be long-term because you had ownership for more than one year. If you have a capital loss, you are permitted to deduct $3,000 per year until it is exhausted.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Dominic T. Cutuli, CPA, is a principal with H2R CPA in Pittsburgh.

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