S-corp shareholder basis

[AccTaxMan]

Shareholder invested $10,000 to the S-corp initially. This $10,000 is his capital stock. There is no paid in capital. So at the beginning of 2009, his basis is $10,000.

During 2009, he withdrew $3,000. Since there is no paid in capital, would this $3,000 be considered capital gain and taxable to the shareholder? But he does have $10,000 basis in the S-corp though.

[jimmcg]

Shareholder invested $10,000 to the S-corp initially. This $10,000 is his capital stock. There is no paid in capital. So at the beginning of 2009, his basis is $10,000.

During 2009, he withdrew $3,000. Since there is no paid in capital, would this $3,000 be considered capital gain and taxable to the shareholder? But he does have $10,000 basis in the S-corp though.

Return of basis. See TTB, Small Business Edition, page 19-8

[AccTaxMan]

Return of basis. See TTB, Small Business Edition, page 19-8

Thank you for the reply.

I also thought it is return of capital. But I have also heard that if there is no paid in capital, any withdrawal should be considered capital gain and taxable to the shareholder. The reasoning is that you cannot deduct the withdrawal from the capital stock because there was no stock transaction during the year.

[BHoffman]

Warning

Other things affect shareholder basis, like profits and losses.

But you probably already knew that

[Lion]

Basis

You're not deducting the withdrawal from his capital stock. You're deducting it from his basis which was previously taxed. Once his basis gets down to zero, then further withdrawals would be gains to him and currently taxed.