Subchapter S Bank Association

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S Corp Shareholder Basis Increase

On July 23, 2014, the Treasury Department and Internal Revenue Service (“IRS”) issued final regulations providing guidance on the circumstances under which an S corporation shareholder may increase their adjusted basis due to indebtedness of the S corporation. Internal Revenue Code (“Code”) Section 1366(d)(1) generally provides that the aggregate amount of losses and deductions taken by a shareholder in any tax year cannot exceed the sum of the shareholder’s adjusted basis in its stock and the adjusted basis of any indebtedness of the S corporation to the shareholder. To the extent a shareholder does not have sufficient basis in their stock to take losses in a particular year, they may use a loan to the S corporation to increase their basis and avoid having to carry forward losses to a subsequent year. The final regulations describe the circumstances under which such loans will be treated as “bona fide” indebtedness of the S corporation to the shareholder – allowing the shareholder to increase their basis by the amount of the indebtedness and recognize the losses currently.

Increasing Sub S Banks Access to Capital

The Subchapter S Capital Access Coalition and Task Force has been organized for the specific purpose of increasing opportunities for banks, thrifts, trust companies and their parent holding companies that have elected Subchapter S federal tax treatment to raise capital and ensure the health and future success of their organizations. Our goal is to enact legislation that would (i) allow Subchapter S banks to issue “qualified preferred stock” and (ii) increase the maximum number of allowable S corporation bank shareholders from 100 to 500. Both measures are designed to enable S corporation banks, the majority of which are community banks, to significantly improve their ability to access vital sources of capital already available to other types of financial institutions. Given the significant limitations S corporation banks face in raising capital and the continued challenges associated with the economy and increasing regulation, both measures would alleviate many of the concerns currently facing S corporation banks.