Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 21
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30Wisconsin Tax Treatment of Tax-Option (S) Corporations and Their Shareholders
ber 31, 1998, and it doesn’t make any distributions. The basis
a. The shareholder’s cash contributions and the ad-
of the shareholder’s loan will be restored to $5,000, and the
justed basis of other property that the shareholder
remaining $4,000 of basis increase will be used to increase the
contributed to the tax-option (S) corporation, plus
stock’s basis back to $4,000. The shareholder may then deduct
the remaining $4,000 of the corporation’s ordinary loss for the
b. Amounts borrowed for use in the activity that the
year ended December 31, 1997, which will reduce the basis of
shareholder is personally liable for the repayment of,
his stock to zero again.
or has pledged property not used in the activity as
security for the borrowed amount.
Example 4: On January 1, 1996, a nonresident of Wisconsin
invested $10,000 to acquire 100% of a tax-option (S) corpora-
The at-risk limitations apply at the shareholder level. To
tion’s capital stock. The shareholder and the corporation each
determine if the at-risk rules apply to an activity, the tax-
file returns on a calendar-year basis and the corporation has no
option (S) corporation must identify each activity in
indebtedness owing to the shareholder. The corporation does
business in and outside Wisconsin. For the 1996 calendar year,
which it is engaged and provide each shareholder with a
the corporation computed a $10,000 ordinary loss, of which
schedule reflecting that shareholder’s share of the gross
40% was attributable to Wisconsin. Since the shareholder is a
income and deductions for each activity.
nonresident, she may deduct $4,000 of the loss (40% x
$10,000) on her 1996 Wisconsin return. The shareholder’s
3. Passive Activity Limit
Wisconsin stock basis is decreased to zero by the $10,000 loss
as determined under Wisconsin law.
Internal Revenue Code section 469 provides rules that
limit the deduction of certain losses. Although these
In 1997, the corporation computes a $15,000 ordinary loss, of
limits don’t apply to a tax-option (S) corporation di-
which 55% is attributable to Wisconsin. The shareholder may
rectly, they may apply to its shareholders. The passive
not deduct any part of the $8,250 loss attributable to Wisconsin
on her 1997 Wisconsin return. She may carry over the 1997
activity loss limits apply after the at-risk limits.
Wisconsin loss and deduct it on her returns for future tax-
option (or post-termination transition period) years, whenever
Generally, a passive activity is any activity that involves
she has Wisconsin basis to apply against the loss.
the conduct of any trade or business in which the share-
holder doesn’t materially participate and rental activities,
Note: A shareholder’s Wisconsin basis in stock of a multistate
as defined in the federal regulations. Rental real estate
corporation is reduced by his or her pro rata share of the total
activities in which a shareholder materially participates
company loss as determined under Wisconsin law. This is the
are not passive activities if the shareholder meets certain
shareholder’s loss before application of either apportionment
eligibility requirements. The corporation must identify
or separate accounting to arrive at the amount attributable to
separately each activity that may be passive to a share-
Wisconsin operations.
holder.
2. At-Risk Limit
The passive activity rules also apply for Wisconsin
purposes. However, if a shareholder’s federal and
The federal at-risk rules may limit a shareholder’s
Wisconsin income from the corporation differs, the
deductible loss from an activity conducted through a tax-
shareholder may have to recompute the amount of
option (S) corporation. These rules also apply for
passive activity loss deductible for Wisconsin, depend-
Wisconsin purposes.
ing on the reason for the difference.
The at-risk rules generally apply to a shareholder who
There are three types of differences between federal and
has —
Wisconsin income:
a. A loss or other deduction from any activity carried
a. Schedule I adjustments required in computing
on by the corporation as a trade or business or for
federal adjusted gross income for Wisconsin pur-
the production of income, and
poses because a provision of the Internal Revenue
Code doesn’t apply for Wisconsin or a federal law
b. Amounts in the activity for which the shareholder
change becomes effective at a different time than
isn’t at risk.
federally.
A shareholder’s amount at risk is —
b. Adjustments required because different elections are
made when calculating federal adjusted gross in-
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