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.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.