Your accountant gave you the correct advice. An S-Corp is a "flow through" entity, which means that the corporation pays no taxes. Instead, the income or loss from the S-Corp flows through onto your personal income tax return.

When it comes to your losses, however, there is a catch. You can only claim losses to the extent of any money you contributed or loaned to the corporation. Guaranteeing a business loan is not good enough.

The good news is that the losses are being carried over, so you won't owe any taxes on your S-Corp's income until those losses have been fully utilized. Most tax programs used by CPAs keep track of your loss carryovers.

Zip Code: 01801

I think I understand.

Now she is telling me that this year 2009 I need to increase my wages and that I can't take out any distributions this year even though I had a profit of $40,000 in 2008, a loss of $3,000 in 2007 and looking to make more profit in 2009 than in '08. I don't undestand why she would tell me that I can't take out distributions if the money is there and I will be taxed on it regardless if I take it out of the company's checking account or not. She says that it has everything to with basis. This is what I don't understand. Can I only take distributions out to the extent of my basis even if I have a profit?

Zip Code: 52240

The tax software that my office uses generates a Basis Schedule for each S-corp owner. Your CPA should be able to print out this report for you, and explain how the basis rules work. While the CPA is probably getting it right, it's important that you have a sense of what is going on with these rules.

Zip Code: 01801