S-Corp. basis

[Gretel]

S-Corp. has earnings of 10,000 at end of year it starts business. If only S/H takes 12,000 in distributions and recognizes 2,000 on his 1040 what happens to basis?

Let's say in following year earnings are 5,000, no distributions. What is his basis? $5,000 or $3,000?

[KJ Judd]

See TTB p. 19-7 for shareholder basis adjustments.

There was a previous discussion on the topic of S corp distributions > basis recently. If take out more than basis is taxed at capital gain on individual's tax return.

Since basis can't go below zero, next year basis will be $0 + $5000 income.

Note both of these examples assume the shareholder didn't contribute anything to the corporation when it was started. Otherwise his original capital contributions also contribute to his basis.

[OldJack]

$5,000.

When he recognized taxable income for the $2,000 excess distribution it is for the sale of a portion of his stock with zero basis. Think of the sale of stock as a separate taxable transaction off the S-corp books and the $10,000 distribution reduces his basis to zero for the current year. Then next years income brings it back up to $5,000. This is assuming the shareholder never paid anything for his shares of stock (not appropriate as stock must be issued for some amount).

There really is no need for it to be handled as a taxable transaction as the S-corp could show $10,000 profit distributions and a short-term receivable due form the shareholder for $2,000. Treating it as a receivable results in a zero basis with the next years income added it becomes $5000. A receivable less than $10,000 does not require interest be paid on the debt.

[Gretel]

Thank you so much. This is what I was thinking but wording some place confused me. Just took this example to illustrate. Didn't want to bring any other issue into the game.