S corporations are flow-through entities, so income, losses, deductions, and credits flow through to the shareholders of an S corporation and are taxed at the shareholder level. Each shareholder is then taxed on their pro rata share of separately and nonseparately stated items. If the shareholder's ownership interest changes, a per share, per day allocation is used (unless the shareholder disposes of their entire ownership interest, in which shareholders can choose to split the tax year into two tax years, with the first tax year ending on the date the shareholder disposed of their ownership interest). Shareholders may also deduct a pro rata share of the S corporation's losses. However, a shareholder may not deduct losses exceeding the sum of (1) the shareholder's basis in the S corporation stock and (2) the shareholder's basis in any loans that shareholder made to the S corporation. Other loss limitations also apply (the …
