Scorp shareholder tax basis

Technical topics regarding tax preparation.
#1
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Assuming this is an one shareholder S-corp.

If we add Form 1120-S Schedule M-2 Line 8 (year end balance of the AAA account) to Schedule L Line 22 Capital Stock, are we getting the tax basis of the shareholder?
 

#2
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It's possible, but not certain.
 

#3
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Harry Boscoe wrote:It's possible, but not certain.


What would be possible situations that may cause a discrepancy?

I am the preparer of this taxpayer's individual tax return. But I am not the preparer and the accountant of his S-corp. Therefore, I have to reply on the S-corp accountant to provide me with the information for his tax basis. The client went to ask. But then today the response of the S-corp accountant was just sending a copy of the S-corp Form 1120-S tax return. Therefore, under this situation, would it be acceptable if I calculate the tax basis of the client by adding the year end balance of the AAA account on the Schedule M-2 to his capital stock amount on the Schedule L?
 

#4
Nilodop  
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What would be possible situations that may cause a discrepancy?. Maybe he bought the S corp stock from the previous shareholder(s). Or inherited it. Or received it as a gift.
 

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Nilodop wrote:What would be possible situations that may cause a discrepancy?. Maybe he bought the S corp stock from the previous shareholder(s). Or inherited it. Or received it as a gift.


It will be fine then. I know he purchased the business from someone else before and then made it a S-corp.
 

#6
Nilodop  
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I was not saying those are the only possible situations. Others can no doubt tell you the rest.
 

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MeaningfulIdea wrote:
Nilodop wrote:What would be possible situations that may cause a discrepancy?. Maybe he bought the S corp stock from the previous shareholder(s). Or inherited it. Or received it as a gift.


It will be fine then. I know he purchased the business from someone else before and then made it a S-corp.


Then wouldn’t his basis include what he paid someone else for the business?
 

#8
Wiles  
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Maybe the AAA balance is wrong.
If the S-Corp preparer doesn’t know the basis schedule from Shinola then it is very very likely that AAA balance is wrong
 

#9
sjrcpa  
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And, it is the shareholder's responsibility to compute his basis, not the S Corporation's tax preparer's.
 

#10
Nilodop  
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Then wouldn’t his basis include what he paid someone else for the business?. Terry, I'm thinking he means he purchased assets of the business and put them in a new S corp., but who knows? Can't tell without a clearer statement of the facts.
 

#11
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Terry Oraha wrote:
MeaningfulIdea wrote:
Nilodop wrote:What would be possible situations that may cause a discrepancy?. Maybe he bought the S corp stock from the previous shareholder(s). Or inherited it. Or received it as a gift.


It will be fine then. I know he purchased the business from someone else before and then made it a S-corp.


Then wouldn’t his basis include what he paid someone else for the business?


You are right.

In that case, Would it be Form K-1 Line 17X (UBIA) plus Schedule L Line 22 Capital Stock plus Schedule M-2 Line 8 year end AAA account balance?
 

#12
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What would be possible situations that may cause a discrepancy?


Also prior year excess distributions and gains on shareholder loan repayments.
 

#13
Wiles  
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sjrcpa wrote:And, it is the shareholder's responsibility to compute his basis, not the S Corporation's tax preparer's.

True, but still shame on the S Corp tax preparer.
 

#14
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Client said initially there were two shareholders. Each of them paid $100,000 to buy the business in 2011. And then later he bought out the other shareholder and paid him $90,000 for his shares. Therefore, he had totally contributed $190,000 to the business. But then on his Form K-1 Line 17x, the UBIA is only $80,000. Can it be possibly correct?

Or perhaps I have an incorrect understanding of the UBIA?
Last edited by MeaningfulIdea on 11-Oct-2019 9:16am, edited 1 time in total.
 

#15
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UBIA doesn't have anything to do with shareholder stock basis.

Just get his prior K-1s and do the work. Somebody has to have these records.
~Captcook
 

#16
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CaptCook wrote:UBIA doesn't have anything to do with shareholder stock basis.

Just get his prior K-1s and do the work. Somebody has to have these records.


In the above case (post #14), would the tax basis = $190,000 + Schedule L Line 22 Capital Stock + Schedule M-2 Line 8 AAA account year end balance?
 

#17
Nilodop  
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Client said initially there were two shareholders. Each of them paid $100,000 to buy the business in 2011.. In what form did this "buy the business" occur? I think we lack facts.
 

#18
Wiles  
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In the above case (post #14), would the tax basis = $190,000 + Schedule L Line 22 Capital Stock + Schedule M-2 Line 8 AAA account year end balance?

No. First we need to confirm AAA is correct. Then we need to remove the AAA balance that belonged to the prior shareholder.

Also need to remove prior shareholder's share of capital stock.

2011 is not that far back. Can you get all 1120S's and K-1s?
 

#19
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Nilodop wrote:Client said initially there were two shareholders. Each of them paid $100,000 to buy the business in 2011.. In what form did this "buy the business" occur? I think we lack facts.


They bought the business and then immediately incorporated it to become a Scorp.
 

#20
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Wiles wrote:In the above case (post #14), would the tax basis = $190,000 + Schedule L Line 22 Capital Stock + Schedule M-2 Line 8 AAA account year end balance?

No. First we need to confirm AAA is correct. Then we need to remove the AAA balance that belonged to the prior shareholder.

Also need to remove prior shareholder's share of capital stock.

2011 is not that far back. Can you get all 1120S's and K-1s?


Ok, I was just looking for shortcut so I hoped I could just use the AAA account ending balance.

I will take your advice to gather all the K-1s through the years and do the calculation myself.

Just to make sure, based on the example in post #14, the starting point of the calculation should be $190,000 (the total amount that he has put into the Scorp), am I correct?
 

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