Subchapter S losses and ability to deduct those losses are limited
It makes sense to have a small business in a Sub S format for tax purposes regardless of whether you are formally licenses by the State as a corporation(Inc) or a limited liability company (LLC). We don’t see problems in them usually unless there are losses. In those circumstances, the IRS requires those losses to be limited to what is called “basis”, or what the shareholders have in the venture. Basis consists of all funds put into the entity as capital stock, additional paid in capital, loans by shareholders personally to the company, but not loan from third parties guaranteed by the shareholder. From this figure is deducted all losses taken in prior years or current year, but not below zero.
If this basis is positive, you can deduct the losses up to the point of making it zero but not below it.
Where those losses have created a negative basis and thus created suspended (not taken losses on your return), you can take those losses in subsequent periods by contributing money to the company or re-arranging your guaranteed loans to your company to a personal loan to you and contributing the funds to your business. This would add to your basis and allow you to deduct previously suspended/un-allowed losses. Good tax planning will often prevent this problem form occurring. So you should be looking at your P&L in October/November to see if a problem will occur, so you can make necessary arrangement to solve it before the year ends. There are a few ways to solve it after year end, but it would need an appointment to see if it would work for you.
