New requirement for shareholder basis statement

Technical topics regarding tax preparation.
#41
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This is a link to a short, but informative article on the basis reporting issue, which as several have stated here, is not actually a new requirement, but one most likely ignored or with a high degree of non-compliance in the past. The "check the box" part is new and makes it clear that the basis statement is required in certain situations. Comparing my Drake prepared statements with the ones in Harry's link, I think they are good to go until or unless someone tells me otherwise.

https://www.currentfederaltaxdevelopmen ... schedule-e
 

#42
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Here's the first line of what the IRS instructions ask for in the computation of an S shareholder's stock basis:
Stock basis at the beginning of the corporation’s tax year.
Yes, that piece of information *might* be available from the preparation software, but there's no reason to count on it. See what I'm saying? You can look at the schedule that Drake provides you, and you can judge whether it's correct or not, but there's no real reason for it to be expected to be correct. Clearly, there may easily be cases where only the shareholder is in a position to know the required information.
 

#43
dsocpa  
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I’ve been doing taxes a long time and I seem to recall the basis schedule wasn’t always required even when with a loss (sometime late to early 1990’s that changed?). But 1999 still seems recent to me- old age I guess. At the start of my career the subject of basis has been one I have struggled with, especially working with certain clients. Some clients are under the misconception that an S Corp was a good deal because they could avoid FICA tax, take losses while living off distributions, and endless loans to and from off the books. Trying to get across the subject of basis was a foreign concept that had never been fully explained by those who encouraged them to set up their business in that manner. Unreliable sources too many to name here.

In the past I attended S Corp seminar’s where the instructors can’t explain the concept very well. A client I inherited years ago had used an accountant, in business over 40 years,Bit and the client's accountant for at least 10 years prior. When I inquired about the company’s basis he said he never tracked basis (he was the client’s personal and business accountant). I was speechless.

The bottom line is it is the responsibility of the individual tax preparer to track basis. I don’t see how one can adequately track basis without completion of schedule L of the 1120S (basically the balance sheet). It’s not required if receipts and assets are under $250k but I complete for every S corp return I prepare no matter the size. And forget the QuickBooks balance sheet, it is almost never correct.

My advice is to prepare the basis schedule based on what you know, and the client can convey. I always encourage them to obtain the Form 1120S filed if not prepared by myself. I do not blindly accept the schedule included with the K-1.
Several seminar’s I’ve attended in the past have included a basis schedule worksheet with the course materials. Some better than others.

BTW, some of my colleagues have told me they never set-up S Corps for clients, only C corps…….
 

#44
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Scenario: Two shareholders own the stock of an S corporation, 50-50. During the year, one of those shareholders buys 10% of the corporation's stock from the other shareholder, paying the other shareholder $14,444 in cash for the 10% of the S corporation's outstanding stock.

How does ***Drake*** know this happened, and how can ***Drake*** possibly know what effect this purchase had on the purchasing shareholder's tax basis in the stock that he, the purchasing shareholder [now] owns in the S corporation?

I insist that Drake cannot have the information to prepare the ***required*** computation of the purchasing shareholder's stock in the S corporation, unless somebody ***told*** Drake that information. In the big picture, somebody else - somebody other than Drake - had better be keeping track of the shareholders' basis in their stock, because Drake is not in a position to have access to that information.

And, what's more, that "somebody else" isn't the corporation, either.

There's beer in the refrigpbrerator. Join me.
 

#45
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Late to this party, sorry...had some time to poke around a bit. I use ProSeries, and the only basis statements are inside the 1120S or 1065 returns...not the 1040's. I don't even see a place for them to appear....wondering what I'm missing....?
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#46
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"...the only basis statements are inside the 1120S or 1065 returns." In that case, how does ProSeries propose to provide information in those statements that isn't available except to the shareholders, i.e., *outside* the corporation?

Do the ProSeries statements start with something like "Tax Basis at the beginning of the year"? If so, where do they get that information from, or do they somehow give a definition of the information that they're providing that covers the case where the "outside" basis might not be the same as the "inside" basis, for reasons known only outside the corporation?
 

#47
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JR, Drake's statements are within the 1040 and there is a diagnostic to include a PDF of the statements, which is kind of silly on one hand, because the program is actually creating the file. It only shows up when there is a K-1 present. So far all of mine come from the client's corporate tax return. If adjustments need to be made to the form to go with the tax return, then the preparer can do that.
 

#48
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Proseries has it completely sdrawkcab if what JR1 said is true.

Basis can't really be tracked accurately by the corporation. What if the shareholder bought his shares from another shareholder and did not get them from the S corporation directly? How would the S corp know what he paid for them? And how does the S corp know whether or not the shareholder has made the election to take losses and deductions before non-deductible expenses? That election can have a big affect on the basis calculations.

Puzzling to me that so many preparers seem to try to do this from the wrong end and look to the S corp returns. Almost like looking at someone's birth certificate to find out what college they went to.
Because on T.A. ten was the most you were allowed
 

#49
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"Almost like looking at someone's birth certificate to find out what college they went to."
Wow!

That there might could have a really big effect.
 

#50
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Well, I'll disagree Ten, it has to start at the corp level. It's much easier...We control what goes on that basis statement, so if they're purchased shares, inherited, etc. we enter that. But as the years march on, the ins and outs are very well tracked right there. Yes, it's the s/h's responsibility, but apart from the info that is only on the corp books, well, arguably the K-1, too...that's the best place to keep it....it's just that you then have to move that over to the 1040 with the K-1 import...and I don't see that part so far.
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#51
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Tenletters wrote:Proseries has it completely sdrawkcab if what JR1 said is true.

Basis can't really be tracked accurately by the corporation. What if the shareholder bought his shares from another shareholder and did not get them from the S corporation directly? How would the S corp know what he paid for them? And how does the S corp know whether or not the shareholder has made the election to take losses and deductions before non-deductible expenses? That election can have a big affect on the basis calculations.

Puzzling to me that so many preparers seem to try to do this from the wrong end and look to the S corp returns. Almost like looking at someone's birth certificate to find out what college they went to.


Well, yes and no. Theoretically, you're absolutely right.

But most of the corporate returns that would be prepared in many packages including Proseries would be smaller, more closely-held corporations with potentially less sophisticated owners where the information (especially loans to the corporation) would be best found in the corporate files. And with these smaller corporations, as a preparer you'd want to have basis information at the corporate level to help with depreciation elections, etc.
 

#52
TaxCut  
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So I did the same return in Drake and Proseries wher client had small loss on K1-S.

Proseries takes the loss on the 1040 no questions asked. No basis worksheet, nothing.

Drake doesn't take the loss unless you enter basis in the worksheet than you get the diagnostic that an attachment is required on how basis was figured.

What gives. I've used Drake for about 5 years now and had used Proseries before that. Am contemplating returning to Proseries because of the diagnostics, it handles states better, and a few other things. But the fact that it's taking a loss with no basis entered is a concern. :shock:
 

#53
TaxCut  
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Figured it out on Proseries.

You have to check "some investment not at risk" on the K1.

Then goto 6198wks part 2 and enter the adjusted basis.

Only drawback is you'll have to track basis separately or probably pay an extra $10 and intuit will sell you a worksheet. :o

Nice thing about Drake is that it has a basis worksheet... hmmm.. decisions.
 

#54
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This discussion about a "requirement" mentioned on page 2 of Schedule E for the 2018 Form 1040 (which apparently was not found on the 2017 Schedule E) makes me think of the question: To what extent does the Internal Revenue Service (that is, "the Secretary of the Treasury or his delegate") have the legal authority to "require" that a certain specific item of information be reported to the IRS, or that a particular record be kept?

Any person [ . . ] required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to [ . . . ] make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution [ . . . ]


--from 26 USC section 7203 (emphasis added).


Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary [of the Treasury or his delegate] may from time to time prescribe [ . . . ]


--from 26 USC section 6001 (emphasis added).


When required by regulations prescribed by the Secretary [of the Treasury or his delegate,] any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.


--from 26 USC section 6011(a) (emphasis added).


Suppose the "Secretary of the Treasury or his delegate" promulgates an official Treasury regulation "requiring" filers of Federal income tax returns to include a statement listing every single cash receipt and disbursement for the year, regardless of how small, regardless of whether the receipt is taxable, and regardless of whether the disbursement is being claimed as a deduction. Would this be a legally binding requirement?

Much of the information that apparently is "required" by the official IRS forms and instructions is not specifically identified in the statutes or Treasury regulations.

Is there any legal limit to what the Secretary can "require" where the "requirement" is found in an official Treasury regulation, but not in the statutes?

And, is there any legal limit to what the Secretary can "require" where the "requirement" is found only in the forms and instructions, but not in any statute or official Treasury regulation?
 

#55
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I've always used the 6198 in Proseries to keep my taxpayer basis from year to year (along with the basis stmt from the S corp also)

Now there is the 7203.

Do we use one, the other, or both ?

This is really nice to see on April 12th !
 

#56
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Form 6198 is for at-risk limits not basis. They are not the same thing.

edit: example

I start a new S corp and put 10,000 in a business bank account. I borrowed 4,000 of it from my wealthy father in law. My basis is 10,000 but my at-risk amount is 6,000
Because on T.A. ten was the most you were allowed
 

#57
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But if FIL gives you the cold stare across the Thanksgiving table that makes it recourse and we're back to $10k at-risk.
 

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