S Corp - Shareholder Basis

[pmedders]

Need clarification - if stockholder in S-Corp loans money to corporation in 2005, would there not be an adjustment to debt basis for that stockholder?

Have a client that gave me K-1 for S-Corp and also gave me a copy of the 1120S handled by a CPA and balance sheet shows loans from shareholders $100,000 and additional paid-in capital of $46,506; however on the attached shareholder basis computation worksheets for each shareholder, I see no adjustment for additional paid-in capital or shareholder loan. My client stated he loaned corporation $50,000 in February of 2005, but there is no adjustment to debt basis. Is there certain circumstances that shareholder basis would not be adjusted? If shareholder loaned the $50,000, should I take what client tells me and add $50,000 to basis or should I contact CPA to ask for reason why debt basis was not increased? Any help will be greatly appreciated.

[jimmcg]

S Corp S/H Basis

Get documentation of the loan to the S Corp from your client and further clarifiacation of the shareholder basis from the CPA who prepared the S Corp 1120S.

[John of PA]

s/h loan

Yes the loan should be added to basis. Debt basis usually is not adjusted automatically by the software, so the preparer must enter the adjustment on the screen. This one slips through the cracks many times in my office, and probably in that CPA's also. I would add the loan amt to the basis and fire an Email to the CPA just to check if he has any commnets or additional input on this.

[JG EA]

Another small point

It is the responsibility of the individual (or one who prepares the individual return) to do basis, not the the one who prepares the S-Corp return.

[BOB W]

Jg

I kind of agee with you. The 1040 preparer does need to ask questions about a K-1 and the shareholder's basis. But that info should be spelled out by the preparer of the 1120s. Form 1065 requires partnerships' details on the K-1, but 1120s' K-1 don't because all shareholders' basis must be identical (pro rata). Some shareholders may have loans to the corporation and/or have outside basis. Outside basis never appears on the corporate return or records and this is where the 1040 preparer needs to look at the past K-1 profits, especially losses, and how basis (as a running total) may effect the current years 1040 tax return.

An avenue of communication needs to be opened between 1120s preparers and 1040 preparers. I believe it must run from the 1120s to the 1040, with the 1040 asking all the questions relative to 1040 issues.

[JON]

Basis

is the responsibility of the stockholder NOT the the corporation. If all the stockholders in an S corp are my clients I will keep track of the basis within the 1120. If not a client I do not keep track. My clients have given me the information from their individual side so it is easy to tie out to the corporate. If I have Sub S stockholders I always track their basis in their 1040 program- that is the ONLY place it is required and used!!!!!!!!!

[jimmcg]

S/H Basis

I believe most of the reputable individual tax software on the market today prompt the preparer to update shareholder (or partner) basis annualy and carryforward to future years.

[John of PA]

Basis update is automatic

Good Point; I have found that with Lacerte, the basis schedule is automatically update (except for debt basis). Of course, we as professionals must review this to be sure it's correct. Thanks for adding to my earlier comment who's responsibility all of this is. As I write this comment, my 12 year old son is watching and wondering what this is all about.

[JG EA]

Software

It is true that software provides basis worksheets with the S-Corp return. However, all the information needed should be there on the K-1. Notice that in the instructions to the recipient of the K-1 it says (on page 2) that you the shareholder are responsible for maintaining basis and that the K-1 has the information to help you. A worksheet is provided for that purpose.

It also says on page 3 of those instructions about how to handle the basis of loans (what the corporation owes you) and what loans are not part of the shareholders basis.

I think that it is not necessary to ask questions of the preparer of the corporation return. This basis worksheet is an extra, because so many individual preparers never do basis at all.

I have had times when the basis worksheet from the preparer of the corporation return has had things on it that were very helpful and I was glad to have it. But, everything should be there - on the K-1 and presumably the shareholder should know how much of the outstanding loans on the balance sheet belong to him.