presented by: national society of accountants 1330 ...basis, basis, basis for s-corp shareholders...
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Basis, Basis, Basis for S-Corp Shareholders How it affects the Client!
Presented by: National Society of Accountants 1330 Braddock Place, Suite 540
Alexandria, VA 22314 800-966-6679
www.nsacct.org 1
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Learning Objectives Upon completion of this course, you will be able to:
• Define shareholder basis and how it is calculated • Determine the impact of shareholder loans and
distributions on basis • Identify when deductible losses are limited by basis • Understand the importance of tracking shareholder
basis
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What is S-Corp stock basis? • The amount of investment in stock for tax purposes
• It is adjusted annually §1367 • It is used to figure amounts that are included or excluded from tax
• It is used to calculate the gain or loss on the sale of stock
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Who’s Keeping Track? • It is the shareholder's responsibility!
• § 1.6001-1(a)
•But wait…
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Who’s Keeping Track? • Inside Basis:
• Maintained on Books of Entity • AAA, PTI, AE&P
• Outside Basis • Maintained by shareholder • Different than inside basis
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Initial Stock Basis • Shares received when S-Corp is formed
• §351 • Purchase of shares – Cost
• Active participant interest deduction • C Corporation electing S status
• Basis at time of conversion 6
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Initial Stock Basis • Gift of shares - donor's basis
• IRC§1015 • FMV limits basis for loss
• Inheritance - FMV at date of death • Shares received in exchange for services
• Measured by stock's FMV 7
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Basis Adjustments • Ordering Rules
• First – Increase for income items and excess depletion
• Second – Decrease for distributions • Third – Decrease for nondeductible, noncapital
expenses • Fourth – Decrease for items of loss and
deduction 8
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Basis Adjustments • Buy / sell stock • Capital contributions • Adjusted annually §1367 • Uniqueness of S-Corp Basis • Ordering Rules Election • Increase / Decrease chart
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Basis - Increase Item Stock Basis AAA Sch. K-1
Purchase Stock Increase No Effect N/A
Contribute Property Increase No Effect N/A
Contribute Cash Increase No Effect N/A
Ordinary Income Increase Increase Box 1
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Basis - Increase Item Stock Basis AAA Sch. K-1
Separately Stated Income Increase Increase Box 2 - 6
Capital Gains Increase Increase Box 7 - 10
Nontaxable Income Increase No Effect Box 16
Code A & B
Depletion In Excess of Basis Increase Increase Box 15 Code C
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Item Stock Basis AAA Sch. K-1
Distributions Decrease Decrease Box 16 Code D
Ordinary Loss Decrease Decrease Box 1
Separately Stated Losses Decrease Decrease Box 2 - 6
Capital Losses Decrease Decrease Box 7 - 10
Deductible Expenses Decrease Decrease Box 11 – 12
Box 14 Code L & M Nondeductible
Expenses Decrease Decrease Box 16 Code C
Basis - Decrease
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Items Stock Basis AAA Sch. K-1
Tax-Exempt Income Related Expenses Decrease No Effect Box 16 Code C
Depletion Not In Excess of Basis Decrease Decrease Box 17 Code R
Taxable Distributions of AE&P No Effect No Effect N/A
Basis – Other?
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Schedule M-2 Analysis •What is…
• AAA - Accumulated adjustments account • Cumulative total of undistributed net income items
• Can be negative from losses • Belongs to corporation, not shareholder
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Schedule M-2 Analysis •AE&P - Accumulated earnings & profits • From C-Corp
•OAA – Other adjustments account • IRS record keeping account
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Limitation to S-Corp Losses • Stock & Debt limitations
• Basis! • At Risk limitations
• IRC §465 • Passive Activity Loss limitations
• IRC §469 16
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• Must be directly from shareholder to S-Corp • Shareholder guarantee of S-Corp loan does not create basis!
• Document! Document! • Note with interest and terms
• Actually pay! • Approve at Annual Meeting
Debt Basis
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•Only relevant in utilizing losses •Only utilized after stock basis has been reduced to zero
•Restore debt basis before stock basis •Repayment of reduced basis debt = capital gains!
•Suspended losses
Debt Basis
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Shareholder Distributions • Distributions are not mandatory
• Even when there is a profit • Non-dividend vs. dividend distributions
• Schedule K-1 or Form 1099-DIV • Must be proportionate to ownership • Distributions in excess of basis • Distributions can be recharacterized
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From: Taxation Basis
AAA Usually tax-free Reduce
AE & P Taxable dividend No effect
OAA Usually tax-free Reduce
Other capital Usually tax-free up to basis
Reduce
Other capital Capital gain in excess of basis
None remains
Ordering rules for Distributions
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•S Corporation from day one • Sole shareholder • 01/01/20XX Stock Basis = $25,000 •Ordinary loss = <$15,000> • Interest income = $500 •M&E expenses = $1,500 •Non-dividend distribution = $15,000
Real World Basis Example
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01/01/20XX Beginning Basis $25,000
Interest Income + $500
Stock Basis before distributions = $25,500
Non-Dividend distribution <$15,000>
Stock Basis after distribution = $10,500
Nondeductible expenses (M&E) <$1,500>
Basis after nondeductible expenses = $9,000
Ordinary loss <$15,000>
Allowable loss = $9,000
12/31/20XX Ending Basis = $0.00
Suspended loss = <$6,000>
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What we did for the last hour? •Define shareholder basis and how it is calculated
•Determine the impact of shareholder loans and distributions on basis
• Identify when deductible losses are limited by basis
•Understand the importance of tracking shareholder basis
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For More Information
National Society of Accountants More information is available including
additional materials at: Booth in Vendor Hall
Or Table in Lobby 800-966-6679
www.nsacct.org