1. Subchapter S-Corporation
Shareholder Basis

2. Housekeeping

3. CPE/CE Credit

4. Certificates

5. Handouts

6. In this webinar… What is shareholder basis?
Why do we care about shareholder basis?
How to calculate shareholder basis
Real life example

7. How much of a loss can be taken on the shareholder’s 1040
How much of a distribution can be taken tax-free or if it is taxable
The gain or loss on the disposition of stock
We care because
Shareholder basis determines:

8. Shareholder basis = Stock basis + Debt basis

9. z
Tip:
Knowing what shareholder basis is, and how to calculate it brings value to the conversations you have with your clients.

10. Shareholder stock basis:
Is the sum of the shareholder’s investment
Is calculated separately from debt basis
Can never go below zero
Is the responsibility of the shareholder to track

11. Initial Stock Basis Cost of Shares §351 property transfers
C to S conversion
Gift basis (§1015)
Inherited stock (§1014)
Stock received in exchange for services [Reg. §1.61-2(d)(2)]

12. z
Increases to Basis
All income items – separately and nonseparately stated
Depletion in excess of basis
General business credit recapture that increase an asset’s basis
COD income taxable to shareholder
Additional capital contributions

13. Example:
Jimmy begins operations of his new corporation and puts $500 of his personal money to open the corporate bank account.
What is Jimmy’s stock basis?

14. Decreases to Basis Distributions Separately stated loss and deductions
Nonseparately stated items of loss
Noncapital, nondeductible expenses
Deduction for depletion oil/gas to extent deduction does not exceed adjusted basis

15. z
Example:
Regina transfers $5000 from the corporate bank account to her personal bank account.
What is Regina’s stock basis?

16. Noncapital, nondeductible expenses
§162(c) – illegal bribes, kickbacks, etc
§162(f) – fines and penalties
§ tax exempt income expenses and interest
§267(1)(a) – related party losses
§274 – portion disallowed M&E
§162(g) – damages paid for violating antitrust laws (2/3 portion of treble damages)

17. Timing of basis adjustmentsz
Timing of basis adjustments
At close of the corporation’s tax year [Reg.§ (d)]
If stock is disposed during the tax year §1377(a)(1)

18. Ordering Rule [Reg.§1.1367(a)]z
Ordering Rule [Reg.§1.1367(a)]
Increase for income & excess depletion
Decrease for distributions
Decrease for nondeductible, noncapital expenses & depletion
Decrease for loss & deductions

19. Shareholder Debt Basis
Different from Partner debt basis
The corporation must owe the shareholder directly
Losses are deducted against debt basis after stock basis reduced to zero
Pass through items of loss & deduction reduce debt basis
Distributions do not reduce debt basis

20. z
A shareholder’s name on a loan made to the corporation by a third party does NOT provide basis.
Smart tip

21. Various things to note on debt basisz
Various things to note on debt basis
Restoration of debt basis
Bona Fide Debt
At-risk limitations
Recapture of Negative At- risk losses

22. Money distributed in excess of shareholder basis is:
TAXABLE INCOME z

23. Putting it all together!
Real Life Example

25. Consequences z Mr. San has $500 of capital gain income
Mr. San might have $ more of capital gain income
Mr. Paolo can deduct on his personal tax return the total amount of his pro rata share of loss