Basis-LLC taxes as partnership to S Corporation

[equinecpa]

I have a question on calculating shareholder basis in an LLC that was formerly taxed as a partnership but has now elected S corporation status.

I don't believe the partners basis in the partnership becomes S corp basis due to differences in methods of calculating basis. So how does one compute the first year basis? Does one start with partners equity and the subtract/add from there? I ask because in this case the partnership loans exceed assets so they start with a negative capital accounts, but do have partnership basis.

[jsamans]

I have a question on calculating shareholder basis in an LLC that was formerly taxed as a partnership but has now elected S corporation status.

I don't believe the partners basis in the partnership becomes S corp basis due to differences in methods of calculating basis. So how does one compute the first year basis? Does one start with partners equity and the subtract/add from there? I ask because in this case the partnership loans exceed assets so they start with a negative capital accounts, but do have partnership basis.

Well, keep in mind that the S-Corp will have separate stock basis and debt basis. According to the IRS, "A shareholder is only allowed debt basis to the extent he or she has personally lent money to the S corporation. A loan guarantee is not sufficient to allow the shareholder debt basis."

The Journal of Accountancy offers some additional insight.