A reader writes: I have a two year old “c” corp. with a lot of deductions, but I do not [have] enough personal deductions. Is there a way to use some corp. deductions on my personal tax return?
You can´t directly carry corporate deductions to your personal return, but in some cases there are things a shareholder can do to decrease the corporation´s net operating loss while decreasing the shareholder´s individual taxable income.
Here´s an example: Ed owns 100% of the shares of Infinite Wisdom Consulting, a C Corporation that has a net operating loss of $5000 for 2006. Ed also operates Beautifully Yours, a web-based sole proprietorship that sells original works created by artists who live near Ed, including Ed´s own paintings and photographs. Beautifully Yours has a net profit of $6000 for 2006.
Among the services offered by Infinite Wisdom Consulting are bookkeeping, tax return preparation services, and marketing services. Beautifully Yours happens to need bookkeeping, tax, and marketing services, and there is no reason it cannot hire Infinite Wisdom to provide these services. If $5000 is a reasonable fee for the services Infinite Wisdom provides for Beautifully Yours, the transaction will reduce Infinite Wisdom´s net operating loss to $1000 and increase Beautifully Yours´ deductions by $5000.
Since Beautifully Yours and Infinite Wisdom are "related parties" according to the Tax Code, Ed will want to make sure that the fee paid by Beautifully Yours is a reasonable fee for the services provided by Infinite Wisdom. A good way for Ed to determine what is "reasonable" would be to show that Infinite Wisdom charged Beautifully Yours at the same rates it would charge any other client.
See section 482 of the Tax Code – Allocation of income and deductions among taxpayers