S-Corp zero basis losses & distributions

[Gretel]

Something doesn't make sense to me and maybe someone can simply explain:

S-Corp has losses for two years, shareholders took distributions in these years, no loan basis exists. The distributions were reported as gains on the 1040, form 6198 shows carryover losses of 10,000.

Year 3 shows profit of 2,000, distributions of 5,000.

Basis = 0
Gain on 1040 = 3,000
Carry-over losses = 8,000, no income from S-Corp. reported on 1040

I am confused on using the 2,000 gain twice, first to increase basis to then turn around reduce distributions that are taxable. Second, carryover losses are also reduced.

Is this correct? Where am I stuck?

Thanks.

[kathyc2]

If I'm following you correctly, the following would have happened:

With the 2K profit basis b4 distributions would have been 2K.
The 2K profit used up 2K of the carry forward. So, the 2K is not taxable this year but the carry forward is reduced by the 2K.
The basis being 2K, they only took distributions over basis of 3K.

[Gretel]

If I'm following you correctly, the following would have happened:

With the 2K profit basis b4 distributions would have been 2K.
The 2K profit used up 2K of the carry forward. So, the 2K is not taxable this year but the carry forward is reduced by the 2K.
The basis being 2K, they only took distributions over basis of 3K.

Yes, that is correct. I am confused that 2k is used twice - to reduce taxable income to zero and to offset distributions over basis......

[kathyc2]

Yes, that is correct. I am confused that 2k is used twice - to reduce taxable income to zero and to offset distributions over basis......

It's not being used twice. The 2K profit is being used once to offset the distribution. The carry forward is being used to offset the profit. I think your confusion is coming from thinking of it as one transaction. It might help if you think of it as separate parts:

If there would have not been a carry forward, the 2K profit would have been taxable. However, since there was a carry-forward in uses up 2K of it, or put another way it allows you to claim 2K or prior unallowed losses.

Your BOY basis was zero, not negative. The profit increase the basis to 2K. The 5K distribution is broken up as 2K return of basis and 3K distribution over basis. If there would have been a loss the entire 5K would be distribution over basis.

If there was a carry forward but no distribution would you not expect the 2K profit to be offset by the carry forward?

[Gretel]

It's not being used twice. The 2K profit is being used once to offset the distribution. The carry forward is being used to offset the profit. I think your confusion is coming from thinking of it as one transaction. It might help if you think of it as separate parts:

If there would have not been a carry forward, the 2K profit would have been taxable. However, since there was a carry-forward in uses up 2K of it, or put another way it allows you to claim 2K or prior unallowed losses.

Your BOY basis was zero, not negative. The profit increase the basis to 2K. The 5K distribution is broken up as 2K return of basis and 3K distribution over basis. If there would have been a loss the entire 5K would be distribution over basis.

If there was a carry forward but no distribution would you not expect the 2K profit to be offset by the carry forward?

Thank you so much Kathy, and you are perfectly right were my confusion was...and yes, basis is zero, not below zero. This is why such distributions are taxable. You help me a lot. I knew it was right but do not like it if something does not make perfectly sense. Your effort is appreciated.

[kathyc2]

Thank you so much Kathy, and you are perfectly right were my confusion was...and yes, basis is zero, not below zero. This is why such distributions are taxable. You help me a lot. I knew it was right but do not like it if something does not make perfectly sense. Your effort is appreciated.

You are very welcome. It's quite easy to get to one train of thought and become confused. I know I do it quite frequently.