Suspended deductions from S-Corp

[appelman]

How do you track charitable contributions made by an S-Corp that are suspended because of insufficient shareholder basis? In the case of suspended Sec. 179 deductions, there's a line on the 4562, but there's nothing similar on Schedule A.

[buzzardbreath]

Good Question

I can't find an authoritative answer, but in absence of any other guidance, I would prorate ALL income and loss items in the proportion they exist, then apply them to the available basis. I'll try to contrive an example - please if someone else knows better, let us hear from you.

Schmucko Corp. encounters a $100,000 loss. Ima Schmuck is a 60% shareholder with a basis of $25,000 on Jan 1st.

The loss is comprised of the following:
Ordinary Loss ($110,000)
Capital Gain + $ 20,000
Charitable Cont ($ 15,000)
Rental Income + $ 5,000

Amounts allocable to Ima Schmuck are 60% of the above, or a net loss of ($60,000)
Ordinary Loss ($ 66,000)
Capital Gain + $ 12,000
Charitable Cont ($ 9,000)
Rental Income + $ 3,000
All of the above should appear on his K-1 in the full amounts above.

Amounts available to Ima when filing her personal return:
Ordinary Loss ($ 27,500)
Capital Gain + $ 5,000
Charitable Cont ($ 3,750)
Rental Income + $ 1,250
Total of all the above is a net of ($25,000) and basis is reduced to zero.

Amounts suspended would be the difference:
Ordinary Loss ($ 38,500)
Capital Gain + $ 7,000)
Charitable Cont ($ 5,250)
Rental Income + $ 1,750

If anyone knows differently, please speak up.

[appelman]

Not quite my question.

What I want to know is, once you know that a charitable contribution has to be suspended, how do you enter it on the 1040 so that you will be able to pick it up in the following year or years, as the case may be. Ordinarily, the contribution will be carried from the K-1 directly to Schedule A. The 1040 program knows nothing about basis limitations.

I can't find an authoritative answer, but in absence of any other guidance, I would prorate ALL income and loss items in the proportion they exist, then apply them to the available basis. I'll try to contrive an example - please if someone else knows better, let us hear from you.

Schmucko Corp. encounters a $100,000 loss. Ima Schmuck is a 60% shareholder with a basis of $25,000 on Jan 1st.

The loss is comprised of the following:
Ordinary Loss ($110,000)
Capital Gain + $ 20,000
Charitable Cont ($ 15,000)
Rental Income + $ 5,000

Amounts allocable to Ima Schmuck are 60% of the above, or a net loss of ($60,000)
Ordinary Loss ($ 66,000)
Capital Gain + $ 12,000
Charitable Cont ($ 9,000)
Rental Income + $ 3,000
All of the above should appear on his K-1 in the full amounts above.

Amounts available to Ima when filing her personal return:
Ordinary Loss ($ 27,500)
Capital Gain + $ 5,000
Charitable Cont ($ 3,750)
Rental Income + $ 1,250
Total of all the above is a net of ($25,000) and basis is reduced to zero.

Amounts suspended would be the difference:
Ordinary Loss ($ 38,500)
Capital Gain + $ 7,000)
Charitable Cont ($ 5,250)
Rental Income + $ 1,750

If anyone knows differently, please speak up.

[S T]

Not for sure, but would you have to complete form 6198 "at risk" for the S Corp basis, which would then limit

Sandy

[buzzardbreath]

Software treatment

What I want to know is, once you know that a charitable contribution has to be suspended, how do you enter it on the 1040 so that you will be able to pick it up in the following year or years, as the case may be. Ordinarily, the contribution will be carried from the K-1 directly to Schedule A. The 1040 program knows nothing about basis limitations.

I believe your question is more related to how software treats the limitation rather than the tax theory. IOW the K-1 will come with the full amount of loss, disregarding the basis limitation. Maybe someone involved with software (like Gary2) will address this. If I were confronted with this, I think I would have to override.

If I am correct about the proration (and I'm not sure I am), then the software procedure would have to perform a distribution of pass-throughs.

[BOB W]

Correct me if I'm wrong, but there is no limitation at the SCorp level for charitable contributions, just not deductible at all at the S level. It fully passes to shareholder to Schedule A 1040. From there it can be limited based on AGI. This becomes a separate carryover item for controlling when it meets the AGI test in the future.

Basis limitation??? There is none. Just enter the total contribution and the tax programs will only deduct what is allowed and will create a carryforward of the unused contribution.

[Burke]

I think Bob W is correct. There is no deduction of charitable contributions at all on the Sub S corp return. They would be allocated to the shareholders based on the proper percentages. I have a client whose charitable deduction is limited every year, and is allocated between 50% and 30% cap gain limitations with a 5-yr carryforward, but the limitation is based on his 1040 AGI. And the software calculates this, as well as tracks it.

[John of PA]

at the shareholder level

Your right that the deduction is limited by the shareholders basis, but that is all done at the shareholder level. It should be fully automaticlly tracked by the tax software on a separate "carryover" type schedule. In Drake it's called "Carryover Worksheet", all at the 1040 level.

[S T]

Yes, I found that as well in Drake - so not sure about other software, also Basis Worksheets and the 6198 At Risk - I believe the charitable contributions limitation and carryover is on the "Basis Worksheet cont"

Sandy

[Gary2]

I believe your question is more related to how software treats the limitation rather than the tax theory. IOW the K-1 will come with the full amount of loss, disregarding the basis limitation. Maybe someone involved with software (like Gary2) will address this. If I were confronted with this, I think I would have to override.

If I am correct about the proration (and I'm not sure I am), then the software procedure would have to perform a distribution of pass-throughs.

I appreciate the reference, but I don't do enough S-Corps to be able to comment off the cuff on the treatment, and the software handling can vary wildly as long as it's a legal treatment. There's no requirement that tax software for the recipients of the K-1 track their basis at all.

[BOB W]

You guys and gals have to stop talking about basis. Shareholder basis has nothing to do with this deduction. It is a pass-through item just like if the t/p made a direct contribution from his pocket to his church. AGI controls the deductible amount on the 1040.

[appelman]

TaxAct doesn't.

They refer you to the worksheet and tell you you're on your own for tracking. They handle at-risk, but not basis. Oh, well. Maybe next year.

Yes, I found that as well in Drake - so not sure about other software, also Basis Worksheets and the 6198 At Risk - I believe the charitable contributions limitation and carryover is on the "Basis Worksheet cont"

Sandy

[appelman]

Not true.

Shareholder basis has everything to do with it. See p. 2 of Shareholder's Instructions for Schedule K-1 (Form 1120S). Shareholder must track basis. Simply put, losses and deductions in excess of basis are suspended. There are some fine points.

You guys and gals have to stop talking about basis. Shareholder basis has nothing to do with this deduction. It is a pass-through item just like if the t/p made a direct contribution from his pocket to his church. AGI controls the deductible amount on the 1040.

[S T]

Appleman your OP was interesting to me, I have not encountered, but then that is what this Board is all about, learning from posts and situations.

I believe this is what you might be referring to on the limitation of Charitable Contributions at the Shareholder level. Seemed to give some good examples. , If not I apologize, I missed the situation you were describing. Doesn't solve your issue on reporting in your software, but does give the examples for limitations.

http://vivianethompson.com/S%20Corporation%20Stock%20and%20Debt%20Basis.pdf

Sandy

[BOB W]

The charitable contribution is not a deduction effecting profit or loss as you stated, it is a distribution. As a distribution, basis is effected but only as it effects operating losses. When distribution in excess of stock and loan basis occur taxable income will come into play to the shareholder as capital gaines income. The charitable contribution is still put on schedule A 1040. The 1040 will apply tax rules for the amount of contribution deduction allowed.

The distribution may not be all taxable, just the excess over basis in the S Corp. The ultimate outcome is a facts issue.