Corporate Income and Losses in an S-Corporation
The IRS treats corporate income and corporate losses very differently when a corporation has elected S-Corporation status. This point is best illustrated through the following, very fictional, example:Heidi incorporates “Heidi’s Hotties, Inc.-An Upscale Dating Service”
Charlie and Heidi are a happily married couple in Los Angeles. Charlie is a successful actor who earns a substantial income. Heidi, however, has aspirations of starting her own high-class gentlemen’s dating service-Heidi’s Hotties, Inc.
After Heidi incorporates her business online at MyCorporation.com, she begins soliciting … (oops, bad choice of words)… I mean recruiting… customer service staff to cater to her all-male clientele. Heidi expects $100,000 in business losses during her first two years of business. Charlie, however, has just earned $3 million filming a documentary called “Dating for Dummies: How to impress your date for less than $10,000 per night.” Because Heidi and Charlie are married and file a joint tax return, Heidi and Charlie can reduce their $3 million in taxable income by $100,000 because all income and most losses incurred from Heidi’s S-Corporation are imputed directly onto the shareholders in an S-Corporation.
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