S-Corp. Distribution more than stock basis

[Gretel]

Please confirm if I have this straight:

S-Corp. shareholder can deduct losses of a greater amount than his stock basis is as long as he has enough basis because he made a direct loan to his S-Corp. But he can not take distributions below his stock basis. Then he has to recognize income.

How is this working in a partnership? Since there is no differentiation between equity basis and basis in loans a partner can take distributions in excess of his equity, right? What type is the interest for the part of the loans used to make distributions?

As always, already thanks for your brilliant minds.

[Armando Beaujolais]

Please confirm if I have this straight:

S-Corp. shareholder can deduct losses of a greater amount than his stock basis is as long as he has enough basis because he made a direct loan to his S-Corp. But he can not take distributions below his stock basis. Then he has to recognize income.

How is this working in a partnership? Since there is no differentiation between equity basis and basis in loans a partner can take distributions in excess of his equity, right? What type is the interest for the part of the loans used to make distributions?

As always, already thanks for your brilliant minds.

General partners' basis increases by their share of partnership liabilities. S corp sharheholders must make loans directly to the corporation to increase basis.

[Gretel]

Armando

Thanks Armando, but this does not answer my question. My question is not in regards to basis in general but to cash distributions. As I understand it, even if you have enough basis throuh direct loans in your S-Corp., you can not take cash distributions in excess of stock basis. You can only use basis to be able to deduct losses.

My question is if this is the same for partnerships or if partners can get cash distributions regardless.

[JG EA]

Cash distributions

Over basis in a parternership would be capital gain to the partner.

[JON]

Disagree in partnership

Cash distributions in excess of basis may cause deficit account balance, but not taxable income. It is to hard to go into here, but if a loan from anywhere causes the loss there "MAY" be limitations on the interest espense taken as regular as opposed to some of it being investment interest expense to the partner. Wait for Bee's and Armando's further explanation for details.

[Armando Beaujolais]

Thanks Armando, but this does not answer my question. My question is not in regards to basis in general but to cash distributions. As I understand it, even if you have enough basis throuh direct loans in your S-Corp., you can not take cash distributions in excess of stock basis. You can only use basis to be able to deduct losses.

My question is if this is the same for partnerships or if partners can get cash distributions regardless.

From IRS Pub 541, under Basis of Partner's Interest:

"...Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner."

I don't see a restriction in taking distributions because part of the basis is made up of a partner's assumption of liabilities.

It follows the concept that assumption of liabilities is treated the same as paying cash, and relief from liabilities is treated the same as receiving cash.

[Bees Knees]

Thanks Armando, but this does not answer my question. My question is not in regards to basis in general but to cash distributions. As I understand it, even if you have enough basis throuh direct loans in your S-Corp., you can not take cash distributions in excess of stock basis. You can only use basis to be able to deduct losses.

My question is if this is the same for partnerships or if partners can get cash distributions regardless.

It would be rather silly to tax an S corp shareholder for taking distributions from loan basis. Don't call it a distribution - call it a loan repayment.

As for partnerships, Armando is correct. Assumption of liabilities is the same as capital contributions for basis purposes. Therefore, a distribution is not taxable to the extent it does not exceed basis, including basis from debt.

[Bees Knees]

Cash distributions in excess of basis may cause deficit account balance, but not taxable income. It is to hard to go into here, but if a loan from anywhere causes the loss there "MAY" be limitations on the interest espense taken as regular as opposed to some of it being investment interest expense to the partner. Wait for Bee's and Armando's further explanation for details.

Small Business Quickfinder, page B-9: "A partner will recognize a taxable gain on a current distribution to the extent that money distributed exceeds the partner's adjusted basis in the partnership immediately before the distribution. Gain is never recognized by a partner who receives a current distribution of property (other than money)."

Sorry I can't quote from TheTaxBook. It isn't out yet...

[Unregistered]

[QUOTE=Sorry I can't quote from TheTaxBook. It isn't out yet...[/QUOTE]

Considering the subject matter, shouldn't we have a Proposed TaxBook by now?

[Gretel]

Silly

Thanks to all of you.

Bees, of course it is silly to call a distribution taken from a shareholder's loan distribution.

The problem is: It concerns last year's tax return, which I didn't do. So it was called distribution and the loan amount didn't change. I try to figure out his stock basis and his debt basis to give advise in regards to distributions this year.

The bottom line should be the same. Just hoping no audit for last year's return.

[JON]

I guess somewhat wrong...

Basis from general partnership includes notes payable. Losses in excess of basis including liabilites can happen, but hard. Most likely way is coming in at good price after the operation is going. Can be done but it is hard. If you are making a distribution out of loans taken the general will normally have basis in loans to offset distribution unless distributions are not in line with partnership ownership %s. Could happen, but would have to have friends and relatives as the partners who said do it.