Tax Brake with Robert G. Nath, Esq.

Example: Joe and Jane own Great Big Company, Inc. It's an “S” corporation for tax purposes, meaning J&J file jointly and report the company's net profit directly on their personal tax return (the company itself pays no taxes). If GBC loses money, then generally J&J can net those losses against their other income. That means they save taxes.

All this is fine and dandy while J&J are happy. If they divorce, what happens to those losses inside the corporation? If both Joe and Jane still own equal stock after the split, they are each entitled to 50% of the corporation's losses, despite their personal divorce. But if one of the two gets the stock, then the losses go with the stock (again, there are very complex rules on how, when, how much, etc.)

Similarly, if there is no corporation and J&J are “proprietors,” they report their income on Schedule C. That Schedule could show a tax loss if the business lost money. That loss gets deduction on the joint tax return, and J&J benefit accordingly. But if they divorce, who gets that loss? Who gets it going into the future? For how long?

So a money-losing corporation, which no one normally wants, can actually save you taxes if you get to use the losses to offset regular income. These are known in the trade as “tax attributes.” Other examples are: capital losses (stock you own that has lost money on paper), tax credits not yet used, charitable contributions, and others.

Therefore, when you are discussing divorce, consider reviewing these “tax attributes” if they exist. They are really similar to personal exemptions (for the kids) in that they are something you can use on your return to lower your taxes. But many people don't know about them when they are buried inside a business or a corporation.

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