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This is my first year (2016) in business as an S Corp. As the sole shareholder and 100% owner of the company, I contributed approximately $2000 to the company throughout the year. However, my company operated at a loss of $1500 this year. The company also doesn't have any loans on its books, neither by me nor a bank.

I understand that all profits and losses pass through to the shareholder and that I will ultimately be able to deduct $1500 from my income in my personal tax returns.

However, what would this look like in my company's balance sheet?

  1. Given that I took the benefit of this $1500 loss, do I somehow
    increase the net revenue by $1500 in Dec 31 or Jan 1 to bring this to $0? I ask because other wise, what if I lose an additional $1000 in 2017? Then I'd pass through a loss of $2500 in my 2017 returns(?)
  2. And because this loss of $1500 passes through to me and my basis in the S Corp is $2000, does my basis decrease by $1500?
  3. How would both of these events be recorded as journal transactions?

Thanks for your help guys.

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  1. Yes. This is done by what's called "closing the books". Your 2016 net loss will be reflected in retained earnings, which is in the equity portion of the balance sheet. The reason we do this is to zero out the income statement accounts, so you can begin your 2017 year fresh. (Taking the $1500 deduction on your individual tax return is not relevant here - books must be closed each accounting period.)

Conceptually, the entries are:

Retained earnings                 1500      
     Net loss                             1500  
  1. Yes. And since you're the sole owner, your basis will equal to the equity balance on the balance sheet. Keep in mind the book and tax basis will probably be different, so you may want to keep a separate calculation to track the tax basis. There is no journal additional journal entry for this.

  2. If you're using bookkeeping software, be sure to research its book-closing/closing entries feature, as it is handled differently depending on the software. For example Quickbooks doesn't explicitly close its books, but re-computes the balance sheet dynamically depending on the selected date range.

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    I upvoted as this is correct (Canadian CPA speaking) but I would only comment that the entry will not credit Net Loss but rather reverse all revenues and expenses into retained earnings, usually. This should only be a technicality for you, especially if your bookkeeping software has a proper book-closing option. – ApplePie Aug 26 '17 at 13:56

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