Can the partner's negative basis be carried over to the s corporation shareholder basis if the company elects to be treated as an s corporation in 2023, but was a partnership in 2022?

When a partnership converts to an S corporation, the tax basis that each partner has in the partnership generally carries over to become their stock basis in the S corporation. However, negative capital accounts in a partnership do not carry over to create a negative basis in S corporation stock. Instead, the basis in the S corporation stock would start at zero. The Internal Revenue Code does not allow for a negative basis in S corporation stock. Shareholders in an S corporation can only deduct losses to the extent of their stock basis (plus any direct loans they have made to the corporation). If a shareholder has a negative capital account in the partnership, it typically reflects losses that have already been deducted or should have been adjusted against their basis in prior years. Upon conversion, the shareholder should ensure that all income, deductions, gains, losses, and credits have been properly accounted for in the final partnership tax year. Any losses that were not deductible in the partnership due to basis limitations cannot be carried over to the S corporation. It's important to consult with a tax professional to ensure that the conversion from a partnership to an S corporation is handled correctly and that all tax implications are properly addressed.

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