Shareholder Basis (C Corp to S Corp Conversion)

Technical topics regarding tax preparation.
#1
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What is the stock basis of an S Corp shareholder upon conversion from a C Corp? I would assume that it would just be whatever the shareholder purchased the stock for originally when the C Corp was first created.

In this scenario, client’s balance sheet prior to S Corp conversion reports $10,000 in capital stock, $200,000 in APIC, $500,000 in R/E, and $(400,000) in Treasury Stock. This company has existed since the 1970s so a lot of the recordkeeping has been lost. The repurchase of shares occurred before I was their accountant and the previous accountant has since purged all of the information for this client, but I believe the company was owned 50/50 prior to the repurchase of shares.

When the previous accountant booked the treasury stock, they likely just debited treasury stock and credited cash. So I would assume the remaining shareholder’s C Corp stock basis would be $5,000 ($10,000 capital stock divided by 2) and $100,000 ($200,000 APIC divided by 2). The $500,000 R/E would just carryover as AE&P on the Schedule M-2 and would not affect basis. I understand R/E needs to be adjusted for certain items that apply differently for purposes of AE&P. But for purposes of this example, assume there are no adjusting items.

So shareholder basis as of date of conversion would be $105,000 for remaining shareholder and $500,000 of AE&P on Schedule M-2. And AAA beginning balance would be $0. Does all of that sound correct? Am I missing anything here?

Thanks in advance for your help.
 

#2
lckent  
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Colorado
When one of the original shareholders was bought out, it appears it was done through a redemption. This would reduce AE&P by the amount attributable to the shares redeemed. See Sec 312 & following.
CPA, Retired
 

#3
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90
Joined:
8-Feb-2023 10:55am
Location:
Staunton, VA
Thanks for the info. Good catch! Not sure how I missed that when reviewing these rules earlier.
 


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