When your clients show up with missing basis records (or none at all), it puts you in the tough position of sorting through years of incomplete information. You know the IRS doesn’t accept “We didn’t know” as an excuse, and a poorly calculated basis can mean disallowed losses or unexpected taxes.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.

Q: If you issue a Form 1099-NEC for a barter exchange for a partner, does this become the partner’s basis?

A: Yes. If Form 1099-NEC is issued for barter income received by a partner (on behalf of the partnership), it is generally considered income to the partnership and increases the partner’s basis, assuming the partner is entitled to the income under the partnership agreement.

Q: For a limited liability company (LLC) converted to an S corporation, what is the starting basis for the new S corporation?

A: When an LLC (treated as a partnership or disregarded entity) elects to be taxed as an S corporation, the starting basis for the S corporation depends on the structure (sole proprietorship, partnership or C corporation) before the election. For example, if the LLC is a single-member LLC taxed as a sole proprietorship, generally the starting basis is the tax basis of the sole proprietorship’s assets, assuming the requirements of §351 have been met.

Q: If you contribute additional capital to an S corporation, can you take it out in another year, if the shareholder has enough basis?

A: Yes. If you have enough basis (from cash contributions, additional capital contributions, etc.), you can take cash distributions and have no tax due.

Q: If you take distributions in excess of basis, do you need to report capital gains for that amount?

A: No. You must report capital gains if you take distributions in excess of basis. It is treated as a deemed sale of the stock, reported on Form 8949, Sales and Other Dispositions of Capital Assets.

To learn more about reconstructing basis for shareholders and partners, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Amy is a greater-than-2%-shareholder in an S corporation. Amy paid for her health insurance premiums personally, however, she sought reimbursement from the S corporation, which included those amounts in wages on Form W-2, Wage and Tax Statement, in Box 1. Can Amy deduct the health insurance costs?

Answer: Amy can deduct the premiums she paid personally since they are reimbursed by the S corporation assuming she has enough earned income from the business. For S corporation shareholders, earned income includes the individual’s wages, as defined in §3121 for purposes of Federal Insurance Contributions Act (FICA) taxes (i.e., social security and Medicare payroll taxes), from the S corporation [§162(l)(5)(A)]. Amy deducts these amounts on Form 1040, Schedule 1, Additional Income and Adjustments to Income, Line 17, Self-employed health insurance deduction. The deduction itself is calculated on Form 7206, Self-Employed Health Insurance Deduction.

The IRS is implementing a change that affects all tax professionals with a preparer tax identification number (PTIN). This is not a scam. The IRS has officially announced the change, and we are sharing this to keep you informed and prepared.

What is ID.me?

ID.me is a trusted technology provider used by multiple federal and state agencies to verify identity and manage secure credential logins. It helps protect your personal information and access to IRS services.

What is a PTIN?

A preparer tax identification number is issued by the IRS to paid tax return preparers. If you prepare or assist in preparing federal tax returns for compensation, you must have a valid PTIN.

What is changing?

Beginning July 7, 2025, the IRS will require all PTIN users with a Social Security number (SSN) to sign in using ID.me credentials. The traditional username and password method will no longer work for users with an SSN.

• If you already have an ID.me account through another government agency, you can use it to sign in.
• If you don’t have an ID.me account, you must create one to access the PTIN system.

For the official IRS notice and guidance, visit: https://rpr.irs.gov/ptin

Next steps

1. Check if you already have an ID.me account. If you do, try logging in at the PTIN site using ID.me.

2. If you don’t have an account, go to ID.me to set one up. You will need:

   • A government-issued photo ID
   • A camera-enabled device (computer or mobile)
   • An email address

Visit https://www.irs.gov/privacy-disclosure/how-to-register-for-irs-online-self-help-tools for more guidance.

Official IRS communication

Below is the full notice the IRS recently sent out to PTIN users: