Suspended deductions from S-Corp

[BOB W]

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

I just read the link provided and I stand corrected due to ordering rules and the corporation DOES limit charitible pass-through distributions. The Corp will continue to track basis for future release of previous contribution-distributions.

WOW.....................

The issue of excess distribution being taxable as Capital Gaines income has been averted at the S level, I guess...???

[appelman]

Right.

That's it.

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

[appelman]

Not quite.

It's really up to the shareholder to keep track of basis and follow the ordering rules. Some 1120-S software will provide worksheets to help. But the K-1 will give total income, distributions, losses, and deductions, and the shareholder has to take it from there.

I just read the link provided and I stand corrected due to ordering rules and the corporation DOES limit charitible pass-through distributions. The Corp will continue to track basis for future release of previous contribution-distributions.

WOW.....................

The issue of excess distribution being taxable as Capital Gaines income has been averted at the S level, I guess...???

[S T]

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.

Fortunately in the software I am using, I can track at the 1120S level, if I do prepare those returns, if not, I also have a level at the Shareholder 1040 return to track basis, from records furnished.

If that is not an option for the Tax Software being used, in TTB Small Biz, 24-5 there is a worksheet and then CFS Small Business Tools has a worksheet - that can be completed for Shareholder's Basis, for those of you "proficient" in Excel, I would imagine you can develop one of your own, to keep track of the suspended or carryover's for Charitable Contribution limits, and Sect 179 limits.

Sandy

[buzzardbreath]

Start with GAAP

Sandy, I'm sorry, I tried to open the VivianThompson link with 3 different browsers without success. I hope I am not reiterating her.

We need to start with the GAAP Profit and Loss, whether we want to or not, because Schedule L and M-1 depend on it. Charity is a 100% dollar-for-dollar reduction in profit, increase in loss, and resultant decrease to Retained Earnings just like any other expense. It only changes its character when we leave GAAP. Realize that starting with GAAP we have a deduction like any other.

Next phase we must determine the amount the S corporation can deduct. To begin with, the same general 10%-of-income limit applies to S corporations as C corporations (see Form 1120-S instructions for charitable contributions and IRS Pub 526). Appelman's original situation, many posts ago, suggests that the S corp had a loss, so NONE of the charity would be deductible to the S corp to begin with. We may refer to this as a limitation at the corporate level, before any pass-through is even considered. The amount of disallowed charity should appear as a current year book-to-tax adjustment on Sch M-1 in order for Retained Earnings to balance, since Retained Earnings must recognize ALL of the charity as expense. If earnings in successor years are adequate, it is quite possible some of the lost charity deduction may be recovered, and if so, this also must be a Sch M-1 adjustment.

Let's stop here before we ever get into pass-through. At this point, we realize there exists another tier of limits at the corporate level. And the reason this is critically important is the lost adjustment is a disallowed deduction and any successor-year recovery adjustment is non-taxable income.

At this point the shareholder effect becomes relevant because the BASIS WORKSHEET requires that the share of non-taxable income must be added to the shareholder's basis, and the share of non-deductible expenses must be subtracted from shareholder's basis. TTB has an excellent shareholder basis worksheet on page 24-5.

Mr. Appelman's original post suggesting a corporate loss implies that, because of the corporate limitation, there would be no charity to pass-through to the shareholder's K-1, so any Sch A deduction available to this shareholder is a moot point.
However, it should be noted that even though no deduction passes through, his basis is reduced by his share of the disallowed charity anyway.

Two related subjects have surfaced in this discussion. The first is the suggestion that the IRS allows a shareholders' Sch A deduction to "trump" all the limitations described above. This language is found in IRC §1366, but this section cross-references IRC §1367 and we find that this applies to adjustments for contributed equipment or other non-cash items. Appelman did not refer to this in his original post, so I assume he didn't want to open this door to another extremely complicated corollary.

The second subject deals with distributions and the capital gain phenomenon which surfaces if actual amount of distributions exceed basis (adjusted upward by loan basis). Distributions are losses are two different things, and I believe Appelman's situation did not refer to an excessive distribution, only an excessive loss. If we are to consider distributions, this opens up yet another discussion.

A third subject has surfaced, however, which can be extremely relevant in the event that a shareholder is allowed to deduct on Sch A, and that is the matter of 30% and 50% - type charities. The K-1 is supposed to split the pass-through of both types. If deducted on Sch A, the 30% and 50% limits apply to the shareholders' AGI and at this point have nothing to do with the income of the corporation.

In retrospect, the discussion embodies three limits - one at the corporate tier, another at the basis tier, and then yet another at the shareholder's AGI.

UPDATE: I was able to access the Vivian Thompson link, and many of you are buying into the link. The information does not necessarily agree with my interpretation above:
a) there is no 10% limitation at the corporate level. I don't why since this is in the 1120S instructions.
b) disallowed deductions are computed in the basis. Agree.
c) the items of loss are prorated in proportion to their allowability. I agreed, except I prorated items of income as well. The link is correct.

A long post - so long that it loses readers at some point. I'm flattered if you have read the whole thing. - BB

[BHoffman]

Ooops

I deleted two rotten posts I made earlier and apologize!

My Drake software computes the allowable charitable amount and carries the amount forward on the shareholder basis worksheet, and I knew that.

So very sorry.

The information ST provided gives the correct allocation information and agrees verbatim with the IRS information here:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis

If your software doesn't keep track of it, you might use a NOTES page if you have that option. I have to do that for AZ NOL carryforwards because Drake doesn't keep track of it. That NOTES page updates to next year and pops up when I open the file.

[appelman]

Not a distribution.

Contributions are separately stated deductions, like the Sec 179 deduction. As such, they are at the bottom of the normal basis ordering list, after everything else has been taken into account.

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.

[appelman]

Intuit Online 1120-S does, too

But you're still on your own for getting it into the 1040. And Intuit doesn't seem to realize that excess non-deductible expenses are not carried forward; they just disappear.

Fortunately in the software I am using, I can track at the 1120S level, if I do prepare those returns, if not, I also have a level at the Shareholder 1040 return to track basis, from records furnished.

If that is not an option for the Tax Software being used, in TTB Small Biz, 24-5 there is a worksheet and then CFS Small Business Tools has a worksheet - that can be completed for Shareholder's Basis, for those of you "proficient" in Excel, I would imagine you can develop one of your own, to keep track of the suspended or carryover's for Charitable Contribution limits, and Sect 179 limits.

Sandy