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.
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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. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.