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S Corp Basis Calc - New Client

Technical topics regarding tax preparation.
#1
cej5  
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I've taken on a few new clients from a practice that DID NOT perform any basis calculations on prior returns. Some of these entities go back for many years (20 plus years). Many of these S corps have distributions and or losses in 2020 which requires a basis calculation to be submitted with their personal returns. In many instances, even without the requirement I'm left wondering if the S corp owner still has any basis left to take losses. Invariably these clients do not have their records from many of these prior years. For example, they may have returns starting in 2010 but the S-corp inception date was 2002.

Of course, to calculate basis accurately, I would need every return but they are not available. I'm soliciting opinions as to what one would do in these circumstances.

Thanks
 

#2
JR1  
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Most of us would just use AAA/Notes.....IF there's no transfers of shares, inheritances, etc.
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#3
AlexCPA  
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One approach (probably the most extreme) would be to assume that the basis as of 1/1/XXXX is zero. However, any information that you can gather to support a higher basis would potentially help the client -- but be sure to bill accordingly. :)
Even more of my antics may be found on YouTube:
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#4
HowardS  
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Welcome to the real world cej5. In 20 years I've never gotten basis information with new partner/shareholder clients.
I suffer from depreciation.
 

#5
JAD  
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I would ask the question that JR1 raises - have there been any transactions that would cause basis to decouple from AAA. Document detailed question and response in writing. That becomes your support in case an auditor asks for the basis calculation. It is also the support for the basis calculation in the 1040.

If the answer is that there have been transactions, then you have to explain to the client that you/they MUST review prior returns to come up with an accurate basis calculation. Those transactions include gifts of interests, purchase/sale of interest, distributions in excess of basis. You can't just make something up, sign as preparer, and advise your client to sign. The risk to you as the tax preparer is greater than the client's audit risk. You will have to educate the client about the basis rules and the fact that just because the information was not maintained on an ongoing basis does not provide an "out" from these rules.

I have dealt with one audit where the auditor was focused on these types of basis issues. It was an individual with 50+ separate partnership interests. Thank goodness I had maintained those schedules. It only takes one audit for the tax preparer to realize how bad things could have gone. At this point, the lack of maintenance of history is not your problem - make sure that it does not become your problems.
 


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