Shareholders in an S corporation may deduct their share of the S corporation's net operating losses. However, the deduction that a shareholder may take is limited to the sum of the adjusted basis of the shareholder's stock in the S corporation and the adjusted basis of any debt of the S corporation to the shareholder. Thus, if a shareholder wishes to deduct his or her share of S corporation operating loss in excess of the shareholder's stock basis, the shareholder may extend a loan to the S corporation, thereby increasing his or her basis. Significant care should be taken in planning a loan transaction with one's S corporation. An undesirable possibility to avoid is having the circumstances surrounding the loan result in the loan's not creating the desired increase in basis. Additionally, the shareholder could end up recognizing ordinary income on the S corporation's repayment of the loan. However, various techniques can be used by a shareholder to deduct a share of S corporation losses in excess of the shareholder's basis in stock and currently outstanding debt by increasing the shareholders' basis in debt through innovative loan structuring.

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