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Examining S-Corporation Losses and How They Are Used

Author

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  • Katherine Lim
  • Elena Patel
  • Molly Saunders-Scott

Abstract

Symmetric treatment of business losses would allow businesses in loss to claim an immediate tax refund. Instead, the U.S. tax system allows for businesses of all forms to use losses to offset positive income in other periods and the owners of pass-through businesses to offset current-year income from other sources. Little is known about how the losses of pass-throughs, including S corporations, are used. In this paper, we use administrative tax data to trace entity-level S-corporation losses through to their owners. We find that the owners of S corporations are able to use a large fraction of losses in the year that the loss occurs, ranging from a low of 49 percent in 2009 to a high of 68 percent in 2005. Because the lack of an immediate tax refund for losses can distort business decisions, that high current-year usage suggests that the tax treatment of losses may have less of a distortionary effect on the business and investment decisions of S corporations.

Suggested Citation

  • Katherine Lim & Elena Patel & Molly Saunders-Scott, 2018. "Examining S-Corporation Losses and How They Are Used," National Tax Journal, National Tax Association;National Tax Journal, vol. 71(4), pages 661-686, December.
    • Handle: RePEc:ntj:journl:v:71:y:2018:i:4:p:661-686
    DOI: 10.17310/ntj.2018.4.04
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