Excess distributions as income

[winnie]

Last year, 1120 S shareholder had distributions in excess of basis. With client's input, we recognized this as an excess distribution on Sch. D in 2006. Now that I am trying to accurately calculate his basis for 2007, I am unsure of the impact of that excess distribution on his basis. Seems to me like it would be a wash: subtract the distribution, add the amount recognized as capital gain. And that would not impact his "inside" basis. Thoughts?

Appreciate it.

[Bees Knees]

That is kind of what happens.

Actually, basis can never go in the hole. So what happens is say you start with $1,000 basis. You take $1,200 in distributions.

$1,000 of the distribution reduces basis to zero.
$200 of the distribution is a capital gain on Schedule D.

The $200 gain portion of the distribution does nothing to basis as it is already at zero. Basis after the $1,200 distribution stays at zero. So if this happened in 2006, your basis as of 1/1/2007 begins at zero.

[winnie]

thanks, Bees