When I was through the K-1s and Balance Sheets early in the life of an S-Corp entity in order to conduct a basis study I noticed there was a loan from the shareholder in the initial year. The loan balance is increasing from year to year for some time. There is new debt being added. The following is a citation from my attached research:
“For debt basis purposes, each loan is looked at separately. Once a specific loan’s basis has been reduced by pass-through losses, new loans from the shareholder do not increase the basis of that loan.”
The problem is when the corporation pays repays the debt. The debt basis has been reduced below the outstanding debt owed due to tax losses wiping out the total stock basis.
I am simply focused on the effect on basis not really the gain, but multiple loans will affect the shareholder’s total basis in the S-Corp. When any loan is repaid, it will affect the debt bases of the loans, and the effect can vary depending on which loan is repaid. Depending on which loan is repaid, the allocation between return of capital and capital gain (partial repayment of debts) could be different. The return of capital reduces the shareholder’s basis for purposes of my basis worksheet.
So unless you know of another way, it seems like I will need to request the loan documents for some of these years to figure what each loan is made of?