Today TaxMama hears from Paula in the TaxQuips Forum, who has a question. “We have one “established” business that has been in operation since 2005. In 2010 we started a new business (another S Corp) and our first business funded the start up fees and expenses for the new business in 2010. The new business has not to date made a profit and has not paid anything back to the first business.
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The first business has made a profit in 2010, and we are now wondering if we can use the expenses that Company A paid for on their tax return.
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Dear Paula,
Either you have two businesses, or you have one business. You have two distinct S corporations, right?
In that case, the money the first business provided should go on the books of the new business as either a loan, or as capital – depending on how you want to handle the funds.
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If it’s a loan, there should be a formal note, spelling out the interest rate and the payback schedule.
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Making decisions like this at the outset, and setting up the business and business plan are among the reasons you need to sit down with your team of advisors (Chapter one of Small Business Taxes Made Easy) when you set up a business.
That process would not only have helped you structure the 2nd business, it might have helped you turn a profit sooner. It still can.
This is a good time to make some decisions. Consider putting your S corp tax returns on extension on March 15th, instead of filing them.
Incidentally, either way, the income from one business and the loss from the second will pass through to your personal tax return via the K-1. So you will still get to use the losses on your personal tax return.
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