What is Basis?
Basis represents the amount of after tax money you used to acquire an asset. Typically, basis is the cash you paid for property like the amount you paid for a car, house or publicly traded stock.
For assets like these, this matters when you sell the asset later. At that time you’ll recognize a gain if the selling price is more than the price you paid (or basis). Or you’ll have a loss if the selling price is less than your basis.
What is basis for S corporation shareholders?
Unlike other assets, the basis of your stock in an S corporation goes up and down over the years. As you know, S corporations do not pay taxes directly, rather annual income and loss flows to the shareholders’ individual tax returns and they pay tax on any that at their individual level.
So in effect every time the S corporation has a profit on which the shareholder pays individual income tax, more after tax dollars are added to basis in the S corporation shares. Likewise, the basis is reduced when there are business losses that reduce other income on your personal return like wages. If you make additional capital contributions to the S corporation or you take out distributions that will also impact your basis because you’re adding or removing after-tax dollars.
Why should you care about basis?
Generally, the deduction for your share of losses and deductions is limited to the basis of your stock and loans from you to the corporation. As a shareholder, you are responsible for keeping track of your own basis. But it’s a complicated calculation that most shareholders don’t know how to calculate and don’t understand its impact on taxable income.
As a result, many S shareholders have been taking a deduction for disallowed losses. The IRS is taking notice and taking steps to make sure only allowed losses are included on shareholders’ returns.
The 2018 Schedule E now requires that a basis calculation be attached to returns that include a loss from an S Corporation that shows there is sufficient basis to absorb the loss. A new checkbox, line 28(e), calls out the need for the basis statement.
This is where BasisCalc comes in. We calculate your basis using the values on your Schedule K-1 plus a few other amounts you need to provide. Based on this we create a Shareholder Basis Statement you can print to PDF and attach to your electronically filed return.
While anyone can calculate their basis, it's very complicated. We're now going to show just how complicated by explaining basis a lot more detail. You'll appreciate just how much easier BasisCalc makes your life.
Basics About Basis
- Basis can never be negative.
- Therefore, distributions in excess of basis are taxed and losses in excess of basis are suspended & carried forward.
- If S shareholders don’t have a basic understanding of the concept, their actions could create unexpected tax liabilities.
S Shareholder’s Stock Basis
Beginning Stock Basis + Contributed Cash & Property + Income Items (including portfolio & tax-exempt) – Distributed Cash & Property – Non-deductible Expenses – Loss Items (including §179 deduction) = Ending Stock Basis
- Initial Capitalization (§351)
- C Corporation Electing S Status
S stock basis = C stock basis
- Purchased Shares
S stock basis = purchase price
- Exchanged for Services
S stock basis = FMV of stock received (not value of services)
- Gifted Shares
S stock basis = donor's basis
- Inherited Shares
S stock basis = FMV at Death adjusted for IRD
Increases in Basis – IRC §1367(a)(1)
- Non-separately Stated Income (Sch. K, Line 1)
- Separately Stated Income (Sch. K, Line 2-10, 16 a & b)
- Non Oil & Gas Depletion (Sch. K, Line 15c)
exceeding shareholder’s pro rata share of the S corporations basis in the underlying property
- Business Credit Recapture (Sch. K, Line 17d stmt)
Amount of credit recapture that adjusts the basis in the underlying property
Decreases in Basis – IRC §1367(a)(2)
- Shareholder Distributions (Sch. K, Line 16d)
- Non-deductible Expenses (Sch. K, Line 16c)
- Non-separately Stated Losses (Sch. K, Line 1)
- Separately Stated Losses & Deductions (Sch. K, Lines 2-12)
Up to shareholder’s pro rata basis of the underlying property
- Business Credit Basis Adjustments (Sch. K, Line 13g)
- Charitable Contributions of Appreciated Property
Charitable contribution deduction amount of appreciated property is the shareholder’s pro rata share of the adjusted basis of the property donated.
- Cancellation of Debt
- Only taxable COD income increases shareholder basis
- Excluded COD income required reduction of tax attributes
Cancellation of Debt
- COD Excluded (IRC §108)
- S Corp must be bankrupt or insolvent
- COD not taxable does not increase basis
- Suspended Losses are deemed NOL & reduces stock basis
- Alternate ordering rule (Form 982)
- Reduce basis of depreciable assets - Election §108(b)(5)
- Reduce basis of inventory - Election §1017
Items that Don't Impact Stock Basis
- Income not included on Shareholder’s Return
- Gain on Sale of the S Corporation own Stock
- Domestic Production Activities Deduction (§199)
- Certain Tax Credits
- May require expenses be adjusted to avoid double dipping, i.e.
- R&D Credit (Form 6765) & FICA on Tips Credit (Form 8846)
Calculating S Shareholder Debt Basis
Beginning Debt Basis + New Current Year Loans – Loan Repayments – Loss Items in Excess of Stock Basis = Ending Debt Basis
- Distributions do not reduce debt basis