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New requirement for shareholder basis statement

Technical topics regarding tax preparation.
#1
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Drake is producing worksheets for debt and stock basis for S Corp shareholders. They indicate they are to be attached to the tax return. Do they satisfy the new requirement to provide information on basis on their own? or do we need to attach something else, too? if so, what is it?
 

#2
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What Drake is doing seems sufficient. My understanding was that a basis schedule was only required if the S corp. stockholder was reporting a loss? Is this not the case?
 

#3
Gjkycpa  
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We use Drake and are getting efile diagnostics when statement is not attached.
I just assumed it was a new requirement whether a gain or loss. This might catch some distributions in excess of basis that were not reported as capital gains.
 

#4
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It's not a new requirement. Drake is simply playing catch up.
 

#5
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I seem to recall from my reading that the basis statement is required when an S Corp is reporting a loss and there has been a distribution to the shareholder. I also don't recall that being required in years past.
 

#6
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The requirement hasn't changed, but they changed the schedule E page 2 and added a check box for it. So it is more visible now.
 

#7
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I'm late to the party. Sorry.

I can see on page 2 of the 2018 Form 1040 Schedule E that "you must check the box in column (e)" and attach a computation under certain conditions but now I'd like to ask where this *requirement* comes from and who it applies to to whom it applies.

Is it perfectly clear that it - the requirement - imposes a requirement on the passthrough entity, i.e., for it - the passthrough entity - to be responsible for tracking the shareholder/partners' tax bases *outside* the passthrough entity?

Or, is the requirement to maintain records and to attach the computation imposed on the shareholder of the S corp?

I'm not a whiner, but I want to know why I shouldn't whine about this "requirement"...
 

#8
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I want to know why I shouldn't whine about this "requirement"...

Why? Because I say so, that's why!!

Read all about it in this IRS Pub: https://www.irs.gov/forms-pubs/clarific ... -form-1040

"Clarification" - uh...?
 

#9
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Harry Boscoe wrote:I'm late to the party. Sorry.

I can see on page 2 of the 2018 Form 1040 Schedule E that "you must check the box in column (e)" and attach a computation under certain conditions but now I'd like to ask where this *requirement* comes from and who it applies to to whom it applies.

Is it perfectly clear that it - the requirement - imposes a requirement on the passthrough entity, i.e., for it - the passthrough entity - to be responsible for tracking the shareholder/partners' tax bases *outside* the passthrough entity?

Or, is the requirement to maintain records and to attach the computation imposed on the shareholder of the S corp?

I'm not a whiner, but I want to know why I shouldn't whine about this "requirement"...


The requirement comes from 1.6000-1(a) and 1366(d)(1), it is a requirement of the shareholder, not the s-corp.
 

#10
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It has always been the job of the shareholder to keep track of basis. It can't be done accurately at the S corp level because the S corp does not always know what the taxpayer paid for the shares (if they were bought from another shareholder) and has no way to know whether or not the shareholder has elected to take losses and deductions before non-deductible expenses.

And it has more or less always been required that basis calculations be sent with the return if there are losses or distributions.

The new wrinkles are the checkbox on page 2 of Schedule E and the fact that IRS has announced their intent to send "soft" letters to taxpayers who fail to attach basis calcs.

It surprises me how many people were surprised by this development when Drake joined the club of software providers that attach the basis calculation by default.
Because on T.A. ten was the most you were allowed
 

#11
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Interesting - I've never sent a basis calculation, and no one has been asked to provide it after the returns were filed. I know I'm not alone in that. However, I did know that the shareholder is supposed to keep track of basis and I always make sure that my software is producing a basis statement so they have that and we have it in the file. Before using Drake, I used La Certe, and I don't recall a basis statement being attached to a return, but it's been a few years now.
 

#12
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The requirement comes from 1.6000-1(a) and 1366(d)(1).
I see quite clearly a requirement imposed on the shareholder to maintain the information necessary to compute tax basis in the S corporation stock and debt, but I don't anywhere see a requirement to attach a computation of that tax basis to the shareholder's tax return (when certain conditions are met). Anybody?

+++++++++++++++++++++++++++++++++++++++

And, tangentially, I'm fascinated by 10letters' "more or less always" qualifier in his
And it has more or less always been required that basis calculations be sent with the return if there are losses or distributions.
from his Post #10 above.
 

#13
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Harry, my memory is imperfect and only goes back thirty or so years in regard to taxes. Like many people, I try to avoid "never" and "always" statements. I have rather large feet and prefer to keep them out of my mouth as much as possible.

But the gist of my comment is true. If you looked up form instructions from prior years, you would see the statement in them that basis calculations should be attached. It is not new in the 2018 instructions.
Because on T.A. ten was the most you were allowed
 

#14
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actionbsns - Lacerte did attach them, unless someone overrode the settings and said don't.
 

#15
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Harry Boscoe wrote: I don't anywhere see a requirement to attach a computation of that tax basis to the shareholder's tax return (when certain conditions are met). Anybody?

Um, the instructions?

And I could be wrong, but I think all they require is a typical one-year basis worksheet (BOY basis, adds and subtracts, EOY basis). I don't think they require the full history back to year one. But at least they have you on record for what you claim is true for the current year, I'm sure they can request more history in an audit.
 

#16
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I've read all these posts and the posts at another bulletin board on this topic. So far there seem to be about an equal number of preparers who feel this has always been required and those who feel it's a new requirement.

The question that has surfaced in my mind is this, if it has always been a requirement to attach a basis statement to a tax return, why haven't we gotten letters after returns were filed without them, requesting that they be sent?

I'm kind of thinking this is one more document that most likely has never been reviewed so it's never been missed. Now some politician probably had insomnia a few months ago, thought about all those basis statements, and came up with the idea to rattle our cages by putting a check the box place on the Schedule E.
 

#17
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actionbsns wrote:The question that has surfaced in my mind is this, if it has always been a requirement to attach a basis statement to a tax return, why haven't we gotten letters after returns were filed without them, requesting that they be sent?

I'm kind of thinking this is one more document that most likely has never been reviewed so it's never been missed.

It's only been a requirement if a current year taxable loss is being claimed.

And yes, perhaps it is like the required attachments when multiple stock sales are aggregated on a single line on Form 8949 -- something that usually does not trigger a letter when the requirement is failed.
 

#18
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I always keep track of tax basis for my clients. I have had one client who happens to get audited annually (numbers are too big on his returns) and the auditors always asks to prove the basis in his S Corp. The requirement is -not- new. But none of my other clients have had the issue brought up in an audit.
 

#19
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"It's only been a requirement if a current year taxable loss is being claimed," says makbo.
Do you mean "only" as in "other things didn't require it" or do you mean "only" as in "in prior years"?

"The requirement is -not- new," says CrMyDr.
Do you mean the requirement to maintain the basis information, or do you mean the requirement to attach a computation to the tax return, or do you mean the conditions under which the requirement to attach a computation is triggered?
 

#20
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They never used to send letters. But now they say that they are going to start. And that is the motive to attach your basis calculations now even if you have not in the past.

https://www.irs.gov/businesses/large-bu ... igns#Scorp

https://www.irs.gov/pub/irs-utl/5969.pdf
Because on T.A. ten was the most you were allowed
 

#21
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In 2008, a client's 2006 return was audited. He had over 40 partnership entities. The first thing the auditor wanted to see was the basis schedules. She wanted a historical summary, not just the annual info. Around the time that he had reached 20 entity investments, I had thought to pull this information together. She couldn't believe I had it. Ever since then, I've been tracking basis in Excel for federal, fed AMT, CA, CA AMT, for each K-1 investment and disclosing basis in the tax return.
 

#22
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Tenletters: Thank you, thank you, thank you, for the two links in your Post #20, above. How in the world did you locate those two items? And during busy season, too!

Has anybody reading this been in discussion with the LB&I team about their work and the thirteen resulting campaigns?

Has anybody reading this ever even heard of the IRS's Large Business and International division?
 

#23
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Never heard of them and the first word "Large" generally puts my clients out of their realm. But we'll see. I sent my first S corp return and coinciding personal return yesterday. The personal return has the basis statements that Drake produced. If less than $60,000 interests this department I think they need to change their name. But it's there.
 

#24
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Harry Boscoe wrote:"It's only been a requirement if a current year taxable loss is being claimed," says makbo.
Do you mean "only" as in "other things didn't require it" or do you mean "only" as in "in prior years"?

I mean "only" as in "only this if that", which I suppose you could re-phrase as "this only if that". I mean "been" as in "prior years".
 

#25
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Around the time that he had reached 20 entity investments, I had thought to pull this information together.

Not sure why you didn’t think to pull it together when he had just one…
 

#26
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All, this is crazy, especially when we are not preparing business returns. I have some questions:

1) Is this for a parnerships and S corps?
2) Are you only doing this when there is a loss?
3) What are you doing for clients who get their K-1s from other preparers?

Thank you.
 

#27
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wwwcpa1biz wrote:All, this is crazy, especially when we are not preparing business returns.

But you are preparing a return for a business person, right? I think Schedule E Part II qualifies as a "business return".
 

#28
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All, this is crazy, especially when we are not preparing business returns.


How is it crazy?

How do you know if the loss is deductible on the 1040?

How do you know if the distribution isn’t in excess of basis on the 1040?

You should never, ever prepare a 1040 that involves an S-corp or partnership without having a basis worksheet on file. A basis worksheet prepared by you. That does not change if another preparer prepares the entity return.
 

#29
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Jeff, #25. Back then, no one was talking about the issue. I knew he had a substantial investment in each entity. I just hadn’t tracked the detail. One year, I finished the return with some time left in the budget, and I used that time to pull the data together.

Jeff, #28 above. I completely agree.
 

#30
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I wonder if Form 6198(s) filed with Form 1040 would be "good enough" . If there is enough of an amount "at risk" there must be enough basis.

except maybe when the aggregation allowed under 465(c )(2)(B) and (3)(B) would make the 6198 irrelevant.

Which is probably a rarity.
 

#31
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Considering the questions *still* being asked about this project, I think it behooves us to reread the instructions from page 2 of the 2018 Schedule E, which are the source of [most of] the issues being raised:
Income or Loss From Partnerships and S Corporations
— Note:
If you report a loss, receive a distribution, dispose of
stock, or receive a loan repayment from an S corporation, you
must
check the box in column
(e)
on line 28 and attach the required basis
computation. If you report a loss from an at-risk activity for
which
any
amount is
not
at risk, you
must
check the box in column
(f)
on
line 28 and attach
Form 6198
(see instructions).
OOPS!
Last edited by Spell Czech on 12-Mar-2019 5:44pm, edited 1 time in total.
 

#32
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Herewith instead the following, as well, too, in addition:
Income or Loss From Partnerships and S Corporations — Note: If you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in column (e) on line 28 and attach the required basis computation. If you report a loss from an at-risk activity for which any amount is not at risk, you must check the box in column (f) on line 28 and attach Form 6198 (see instructions).
 

#33
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Spell Czech wrote:Herewith instead the following, as well, too, in addition:

Is there a point to your last two posts? If so, I have no idea what it is. :?:
 

#34
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Is there a point? Yeah, the point is that I'm stumbling all over myself. Thanks for noticing!
 

#35
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Harry Boscoe wrote:Tenletters: Thank you, thank you, thank you, for the two links in your Post #20, above. How in the world did you locate those two items? And during busy season, too!

Has anybody reading this been in discussion with the LB&I team about their work and the thirteen resulting campaigns?

Has anybody reading this ever even heard of the IRS's Large Business and International division?


I have been on a couple of conference calls that included them. And I think some representatives were at the IRS Nationwide Tax Forums last year. It isn't anything new. Just a department that most people seldom come in contact with.
Because on T.A. ten was the most you were allowed
 

#36
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"Just a department that most people seldom come in contact with." So I wonder why they have been charged with sending out soft letters RE stock basis. None of my clients even come close to the definition of a large business, and I would think that's probably true of most one and two member S corps. With identity theft so rampant and constant warnings about scams, it would seem to be a better idea to have a letter like this come from a department that is more recognizable, or at least for which a client fits the definition of the word.
 

#37
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It seems to me that the IRS's Large Business and International Division isn't the bunch that's been charged with sending out the "soft letters," but rather that they are the group that has charged/allowed/enabled/authorized/armed the troops in the trenches to create these soft letters, etc.

The "Campaigns" undertaken by the LB&I Division are enumerated and detailed somewhere here online, and the strong hint is that those people don't really walk on the same ground we walk on, if you get my drift.
Last edited by Harry Boscoe on 14-Mar-2019 6:45pm, edited 1 time in total.
 

#38
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There's a draft of the "soft letter" that will advise our clients of our omission of the basis computation attachment from their individual returns. It's available on the internet, but it can't be copied. Probably for security reasons... :lol: :lol: :lol: :lol: :lol: :lol: :P

Also, there's a version - draft or sample or whatever, I don't know - of a computation of an S corporation shareholder's tax basis, probably stock and debt owed him/her by the S corporation, that might *might* **might** be what they're looking for. Starts with beginning of year tax basis, i.e., it appears not to be cumulative from the beginning of time....
 

#39
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Harry, that actually brings us back to my original question of whether or not the documents prepared with my software was acceptable for what they are asking for. Do you have a link to the sample stock and debt format?
 

#40
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You might be able to find something that might help you do what the Sch E instructions might be telling you you have to do on pages 4 and 6 of the instructions for the S Corp K-1: https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf

I am not in a position to judge whether this might be what your software gives you, or not. :cry:
 

#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
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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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