Sub S Distribution in Excess of Stock Basis

[Burke]

Have a K-1 prepared by accounting firm with ord loss on line 1. Client is 10% shareholder. K-1 shows distribution of $1,700+. Note on supplemental schedule page shows "Distribution in excess of stock basis. Report on Sche D." No basis calculation is given, but client says he borrowed $80K to buy into Sub S. This is not "basis?"

[BHoffman]

I would have the client get the basis worksheet from the K1 preparer.

[Snaggletooth]

Shareholder responsibility

It is the shareholders' responsibility to track their own basis, not the corporation.

There is a difference between your client borrowing $80K on his own to contribute to the corporation, and the corporation borrowing the money with his co-signature. Find out the facts. If he borrowed the money personally, then his basis uses whatever amount he contributed to corporate capital.

If in fact he has more losses than his basis, the corporation's accountant has told him correctly, report the excess on Schedule D as income.

[Burke]

I am assuming the accounting firm knows what his basis is, or at least has something to determine that this distribution is, in fact, in excess of that amount. Otherwise, how would they know? Got the client's permission to contact firm and will call tomorrow. Not sure I have ever had one of these before, but I found it rather strange that this goes on D? And how do you determine LT/ST -- the date he became a shareholder? Corp did not borrow $$ with his co-signature.

[Maribeth]

Distributions in excess of basis for an S-corp shareholder are considered to be a return on their investment and are subject to long term capital gain rates. Schedule D.

I maintain basis worksheets on all my S-corp shareholders, be they my individual clients or not. The accounting firm should have those worksheets also.

Maribeth

[Burke]

Yes, I did talk with them today. And they have no record of this shareholder contributing anything to capital with this company. It appears (at least from their records) that all the capital put into start-up was money borrowed from the bank. I think he mentioned one of the majority shareholders may have contributed something from other funds. So I need to question my client a little further. This corp is only 2 yrs old and they have done the returns since the beginning.