The benefits of keeping basis records
For better or worse, tax pros often find themselves reconstructing basis records for shareholders or partners. In a recent webinar, instructor Jaye Tritz, EA, CFP, taught about reconstructing basis records if the client has failed to track this throughout the year, or even multiple years.
Below, you’ll find a few of the top questions from the webinar and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.
Q: How does stock basis permit a shareholder to take a distribution that is non-taxable?
A: The taxable amount of a distribution is contingent on the shareholder’s stock basis. Since stock basis cannot go below zero, a shareholder must have enough stock basis to support the distribution. If the distribution is more than stock basis, the shareholder has a “distribution in excess of basis,” which becomes taxable capital gain, long- or short-term based on the holding period of the shareholder’s ownership period.
Q: When the shareholder has gain from a distribution in excess of basis, does that add to the shareholders’ basis?
A: No, the gain is recognized on a personal level and does not add to shareholder stock basis.
Q: If there is a loan to the bank and the shareholders are personally responsible, does that qualify towards basis?
A: The loan has to be between the shareholder and the S corporation; a mere guarantee by shareholders does not count. Unlike a partner, an S corporation shareholder does not increase basis by a ratable share of corporate indebtedness to third parties. To obtain basis, the debt must be owed by the corporation directly to the shareholder (§1366(d)(1)(B); Treas. Reg. §1.1366-2(a)(2)(i)). The shareholder’s personal guarantee of the corporation’s obligations to third parties does not create basis (Treas. Reg. §1.1366-2(a)(2)(ii); Rev. Rul. 70-50 and 71-288).
Q: How do guaranteed payments impact a partner’s basis?
A: Guaranteed payments have no separate effect on a partner’s basis. They are usually considered a §162 business expense and, therefore, are already netted out of income reported in Box 1 of Schedule K-1, Form 1065, U.S. Return of Partnership Income.
To learn more about S corporations, partnerships and Form 7203, 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 join our completely free 30-day trial, visit natptax.com/explore.