Debt basis for a S-Corp K-1

I have a clients that provided me a K-1 ( S-Corp) He owns 80% of the business. The K-1 shows a ordinary income loss of ($225,000). His basis in the business is $40,000. Now, in 2017, he did a shareholder loan to the business for $300,000. The ending balance as of 12/31/2017 is $300,000. I don't see it on the K-1 basis but I do see it on the balance sheet of the company ( I did not prepare the S-Corp tax return) and he is providing me with loan doc. and a 1099-int that the company is paying him. Should this $300,000 be part of debt basis and allow my client to take the $225,000 loss?

Please let me know what you think.


Ron

Of course.

Agreed. Honestly, the fact that there is a loan documented is amazing. Hopefully it will make your client wonder why you aren't doing the S Corp instead of the other preparer.

I don't see it on the K-1 basis but I do see it on the balance sheet of the company.

Do you mean it wasn't included on the basis schedule provided from the corp? Doesn't affect the proper treatment. Just curious.

Agree with thoughts shared above.

I don't see it on the K-1 basis but I do see it on the balance sheet of the company

There is no place on the K-1 to report new debt. It is up to the shareholder (i.e. you) to keep track of the shareholder's basis.

We hope this won't come as a surprise:

"S Corporation Shareholders are Required to Compute Both Stock Basis and Debt Basis - It is not the [S] corporation's responsibility to track a shareholder's stock and debt basis but rather it is the shareholder's responsibility."

This is copied, pretty much verbatim, from the IRS's website explaining - trying to explain - shareholder stock and debt basis in an S corporation.


Please don't get tricked by JR1's casual, offhanded, blasé but nonetheless quite economical comment at his Post #2, above...

There is no place on the K-1 to report new debt. It is up to the shareholder (i.e. you) to keep track of the shareholder's basis.

I might have been misinterpreting the post, but it sounded like the K-1 came with a basis worksheet that didn't include the $300,000 loan, which would make me wonder about the rest of the return.

I don't think he got a basis worksheet. And the economical answer above is correct.

Spell, editing is art.

Thanks for everyone's reply.

Yes, I did get a S-corp K-1 basis worksheet that did not include the loan. I was told by the CPA who prepared the K-1, that becuase the loan is not recourse loan, it did not have to be included on the basis worksheet and that I would need to determine if the loan should be included in basis for my client. The client proviced me loan agreement documentation, copy of the wire transfer from his personal bank account to the business bank account, and the end balance sheet showing what the balance of the loans is as of 12/31/2017. In my exerience, I would see shareholder's loans on the basis worksheet. Also, the way the CPA was talking to me, I was not sure if I could just add the loan to his basis for his form 1040 without having the CPA add it to the K-1 basis worksheet.

Am I over thinking this? It been a crazy year.

Ron

You're overthinking. Don't let one ahole mess your head.

JR1's advice is spot on.

The S corp is not required to determine basis at the entity level, but if you're a CPA preparing K-1s for outside users, either have it be fully accurate or suppress the worksheet instead of making stuff up.

If you can find the IRS's worksheet and schedule of S corporation shareholder stock and loan basis, I'll find the IRS's instructions for them. There's a business opportunity here, about to slip through our fingers...