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Shareholder tax basis

Technical topics regarding tax preparation.
#1
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Scorp shareholders tax basis has become a hot topic due to the new TCJA requirement. I am seeing a few threads on this topic in the forum already.

Helping the clients to determine the tax basis is going to be a headache. I suppose we will need their prior year tax returns, etc.

A quick question same to my mind. Lets say a shareholder had already taken back all his initial contribution in prior years and therefore his basis had become '0' at the beginning of 2018. Then in 2018, his share of the ordinary income from the Scorp is $1,000. If he did not take any distribution in 2018 and also did not make any contribution, his tax basis would be $1,000. In this case, we do not need to go back to all his prior year tax returns to make the determination. Is my thinking correct?

Is this a common situation? Or is it unusual? In other words, is it unusual for a shareholder's basis be '0' at the beginning of a tax year?
 

#2
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Exactly zero is pretty rare. That implies among other things that the corp has no bank accounts with a balance.
 

#3
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Agree that a zero basis is not common, unless there have been losses. Then you are going to have loss carryforwards. Of course, you would have had to be tracking basis all along in order to have this. In either case, shareholder basis schedules should be prepared and updated annually.
 

#4
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Thank you for the replies.

So we still have to go back to review all the prior year tax returns of the clients in order to figure out the tax basis for them if their former accountant did not keep track of it or did not Include the work basis worksheets in their former tax returns.

If the taxpayer goes back to ask for the basis worksheet, is his former accountant obliged to provide it to him?
 

#5
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BestQuestion wrote:If the taxpayer goes back to ask for the basis worksheet, is his former accountant obliged to provide it to him?


Technically, yes. As it is something that is essential to the proper preparation of his tax return...much like a depreciation schedule.
More practically, what you'll likely find is that the other preparer didn't actually maintain a basis schedule. In my experience, I'll encourage my new client to request it or I'll request it on their behalf with a not-so-subtle nudge that this is a required maintenance item (i.e. "I'm sure you've been tracking this all along, as it is required, but I didn't see it in the information provided...").
Be well prepared for the reality that you'll get nothing from the prior preparer related to basis.
~Captcook
 

#6
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In some cases, it would be very expensive to determine income tax basis. In our area, the cost for a farm appraisal is usually 10,000 to 20,000.
 

#7
JR1  
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And I thought I was the last one computing basis...I started about 10 years ago after a dreadful audit where I learned....

I'm wondering why this is new, BQ? It's part of the deal. And our software does a decent job of tracking it once you turn it on....you must know it to claim losses.
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#8
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Phil Moody wrote:In some cases, it would be very expensive to determine income tax basis. In our area, the cost for a farm appraisal is usually 10,000 to 20,000.


I'm confused about the connection here between appraisal and income tax basis (cost, generally). What am I missing?
~Captcook
 

#9
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Cost is not the only determining factor in tax basis calculation.

Some of my S-Corp shareholders or LLC members have a nasty habit of dying passing their ownership interests to heirs.

S-Corp shareholders get a stepped up basis in the inherited shares, thus the fair market value of the S-Corp must be determined in order to arrive at the new cost basis of the new shareholder. The basic same principles apply to partnerships, but may called a 754 election.

In most cases, the S-Corp refuses to pay for the FMV determination, the shareholder certainly is not going to pay. I have been told that the typical shareholder tax preparer tells their client to use book value.
 

#10
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What an opportunity for added client service, staring us in the face, but it sure-as-shootin' sounds to me like we're running away from it!! 8-) :o :o 8-)
 

#11
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JR1 wrote:And I thought I was the last one computing basis...I started about 10 years ago after a dreadful audit where I learned....

I'm wondering why this is new, BQ? It's part of the deal. And our software does a decent job of tracking it once you turn it on....you must know it to claim losses.


I keep track the tax basis of the cases that I handle.

My OP question is about a hypothetical situation that a new Scorp client walks in without the tax basis. I was thinking about how to handle the scenario. Shall I tell him to go back to his former tax preparer to ask for the tax basis? Or shall I ask hum to bring in all their prior year tax returns to figure the tax basis out for him?
 

#12
JR1  
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Ah, yeah. Sometimes you can make a pretty good guess based on financials...one of us kind of explained that in another thread not long ago.
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#13
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From #2 above:
"Exactly zero is pretty rare. That implies among other things that the corp has no bank accounts with a balance."
If this is really how it is I've been working outside the lines for decades. Please tell me I've read this wrong somehow.
 

#14
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Harry Boscoe wrote:From #2 above:
"Exactly zero is pretty rare. That implies among other things that the corp has no bank accounts with a balance."
If this is really how it is I've been working outside the lines for decades. Please tell me I've read this wrong somehow.


I used to have a ton of clients with zero basis. They'd also have suspended losses, but, certainly, legitimately zero basis.

It's not that rare.
~Captcook
 

#15
makbo  
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Seaside CPA wrote:Agree that a zero basis is not common, unless there have been losses. Then you are going to have loss carryforwards. Of course, you would have had to be tracking basis all along in order to have this.

+1 (response in post #3 seems to address Boscoe's question regarding post #2)
 

#16
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"...response in post #3 seems to address Boscoe's question regarding post #2."

Please show me *any* relationship between zero net shareholder "outside" stock tax basis and cash-in-bank balances of an S corporation.
 

#17
makbo  
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Harry Boscoe wrote:Please show me *any* relationship between zero net shareholder "outside" stock tax basis and cash-in-bank balances of an S corporation.

In the OP, it said "Lets say a shareholder had already taken back all his initial contribution in prior years and therefore his basis had become '0' at the beginning of 2018. "

To me, a shareholder making an "initial contribution" to a corp implies a founding shareholder, not someone with only "outside" basis (someone who purchased or inherited shares after the start of the corp). But I'd love to be educated if I drew the wrong implication.

Actually, this is why I dislike partnerships, because of all the skewed ways things can be allocated. I thought with S-corps the rules made it more simple.

Let me re-phrase the OP: if a sole shareholder, and the only shareholder ever, of a corp, which has never secured a loan (or other liability) directly to the corp from an unrelated party, has money in the bank at year end, then the shareholder must have positive tax basis. True/False?
 

#18
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Who has money in what bank account? :roll:
 

#19
makbo  
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The corp, in the corp's bank account. I knew my sentence was probably missing a comma or preposition somewhere, but didn't bother re-wording it. Now, I wonder if you'll actually respond to the tax question.
 

#20
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And maybe your sentence is missing a noun and a coupla adjectives, too.
 

#21
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What do you mean when you say a shareholder "has never secured a loan (or other liability) directly to the corp from an unrelated party"?

Still waiting for a response to my #16...
 


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