221 Ch 12 S Corp Basis Overview Basis
221 Ch 12 S Corp Basis Overview • Basis from Stock and Loans • 2014 Rules for Loan Basis • Operation how basis is used and restored • Accounting for Capital Accounts
221 S Corp Basis Overview • Stock basis- used first • Then Debt Basis • The must be separately accounted for. • How basis gets restored is based on if there is an overall “net increase” or not. • Basis calculation is required with the return when a loss is deducted. • The Shareholder has the responsibility for determining basis.
173 225 E. Order of Basis Adjustments Basis + Income Items - Distributions - Non deductibles - Loss Items
F. Elective Ordering Rule (Reg. 1. 1367 -1(g) 173 225 Basis + Income Items - Distributions - Non deductibles - Loss Items - Non deductibles Would you like to change?
F. Electing Ordering Rule Example 226
F. Electing Ordering Rule Example 226
F. Electing Ordering Rule Example NIM • Without the Election- Year 2 Sus. Loss Current Allow Carryfor Year Loss ward Loss $3, 500 0 0 Nondeduct ible Deductible $4, 500 $14, 000 $18, 500 Total $4, 500 $17, 500 $18, 500
F. Electing Ordering Rule Example NIM • With the Election- Year 2 Sus. Loss Nondeduct ible Deductible Total Current Allow Carryfor Year Loss ward Loss $1, 000 $3, 500 0 $4, 500 $3, 500 $14, 000 $18, 500 $4, 500 $17, 500 $23, 000
F. Electing Ordering Rule Example NIM • With the Election- Year 3 Gain of $5, 000 Sus. Loss Current Allow Carryfor Year Loss ward Loss $4, 500 $3, 500 0 $8, 000 Nondeduct ible Deductible $18, 500 Total $23, 000 $5, 000 $13, 500 $21, 500
F. Electing Ordering Rule Example NIM • With the Election- Year 3 Gain of $20, 000 Sus. Loss Current Allow Carryfor Year Loss ward Loss $4, 500 $3, 500 $1, 500 $6, 500 Nondeduct ible Deductible $18, 500 Total $23, 000 $18, 500 $17, 500 $0 $6, 500
Comment Not Enough Basis? • Contribute cash to corp. • Contribute property • Buy shares • Make loans to the corporation
233 Debt Basis • Final Regulations use Bona Fide debt standard rather than “actual economic outlay. • Guarantees are still based on the “actual economic outlay” standard.
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Old Standard S 1 Corp Cash -0 Loss 100 K S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
New Standard – Bona Fide Debt S 1 Corp Cash -0 Loss 100 K YES 233 S 2 Corp Cash $100 K Income $100 K Client Basis In S 1 $0 Basis in S 2 - $100 K
233 Bona Fide Debt Standard • The following work – Example 1 - Bona Fide Loan from Shareholder – Example 2 - Guarantees remain unchanged – Example 3 - Back to Back Loans – Example 4 - Loan through distributions.
235 Bona Fide Debt Standard B. The James Maguire, et us vs. Comm. TC Memo 2012 -160 • Lead to the 2014 debt regulations. • Taxpayers owned a finance company and an auto dealership. • Finance company earned a profit while the auto dealership operated at a loss.
235 Bona Fide Debt Standard B. The James Maguire, et us vs. Comm. TC Memo 2012 -160 • Taxpayers had basis in the finance company but no basis in the auto dealership. • Taxpayers took a distribution of AR from finance company- at FMV • Contributed the AR to the auto dealership.
235 Bona Fide Debt Standard B. The James Maguire, et us vs. Comm. TC Memo 2012 -160 • IRS disallowed the loses • Court sided with the taxpayer Note: QSub or used of LLC sub could have fixed this also.
235 Bona Fide Debt Standard C. Hargis, TC Memo 2016 -232 • In 2009 and 2010 • Taxpayer was the co-borrower on loans – Arkansas state law holds co-borrowers as directly liable for the loans. • All indebtedness and payments ran directly through the company. – Including loans from related party LLCs.
235 Bona Fide Debt Standard C. Hargis, TC Memo 2016 -232 • Court held that none of the loans increased basis. • 4. Court cited lack of evidence in with regard to the LLC loans to the company.
The lender intended to make a loan to the taxpayer, however the loan documents indicated the taxpayer’s S Corp is the borrower. The taxpayer used the loan for basis to deduct losses. In the case the Court sided with: A. The taxpayer- thanks to the testimony of Bank’s lending officer. B. With IRS, because the Court found there was insufficient evidence to find the loan was made to taxpayer. Answer: B- The Court sided with IRS. Page 236. D.
236 Bona Fide Debt Standard D. Tinsley, TC Summary Op 2017 -9 • In 2006, the corporation took out loans with the shareholders as the guarantor. • Four years later the corporation was liquidated. Taxpayers took loss. • The year after the liquidation, the loan was renewed.
236 Bona Fide Debt Standard D. Tinsley, TC Summary Op 2017 -9 • Both the bank and the taxpayers intended the loan to be to the “taxpayers”. • However the loan documents were still in the name of the defunct corporation. • Finding: Court found there was insufficient evidence to find the loan was from Tinsley.
236 Bona Fide Debt Standard E. Phillips, TC Memo 2017 -61 • Question: Was a judgement against the taxpayer an economic outlay. • Phillips was a real estate developer who had fallen on hard times. • All notes were forced to a judgement • Phillips never made any payments on the judgement.
236 Bona Fide Debt Standard E. Phillips, TC Memo 2017 -61 • Taxpayer’s argued that the judgements were “deemed capital” contributions. • Court agreed with the IRS. Memo: it seems that this is more along the lines of a guarantee and even under the new regs. would not provide basis.
Deducting Losses Against Debt • Once Stock basis is reduced to “Zero” • Loan basis is used. • Example Gary on this page. 237
Example: Deducting Losses Against Debt K-1 Items Non-separately stated loss Long-term capital gain IRC 1231 loss 237 Total $ -41, 000 $ 5, 000 $ -6, 000
Example: Deducting Losses Against Debt Stock Basis Stock basis, beginning Add income items- gain Basis before loss Total losses $47, 000 Stock basis ending 237 Total $ 25, 000 $ 30, 000 $ -0 - Total Loss is comprised of Non-separately stated loss $41, 000 and 1231 loss of $6, 000.
Example: Deducting Losses Against Debt Basis Debt basis beginning Remaining loss Debt basis ending Total $ 50, 000 $ -17, 000 $ 33, 000 237
238 -239 Restoration of Basis • C. If a ‘net increase” debt basis gets restored first, up to the outstanding amount as of the beginning of the year. • D. Net increase- income items exceed loss, deduction and distributions. (pg. 239). • E. Capital contributions are not counted. • F. Otherwise the activity starts with stock basis until it hits “Zero”.
238 -239 Restoration of Basis • Warning: To track debt basis properly you must include the “opening debt balance” in the software.
Example: Deducting Losses Against Debt K-1 Items Non-separately stated Income Long-term capital gain IRC 1231 loss Non-dividend distribution Do we have a net increase? 239 Total $ 41, 000 $ 5, 000 $ -6, 000 $-30, 000
Example: Deducting Losses Against Debt K-1 Items Non-separately stated Income Long-term capital gain IRC 1231 loss Non-dividend distribution 239 Total $ 41, 000 $ 5, 000 $ -6, 000 $-30, 000 Do we have a net increase? Yes not increase of $10, 000.
239 Example: Restoration of Basis • The Rule: if you have a net increase then you restore debt basis first up to its outstanding balance as of the beginning of the year. • Outstanding balance as of beginning of year is $50, 000. • Basis in the loan is $33, 000. • The entire $10, 000 is applied against debt basis.
Example: Deducting Losses Against Debt Basis Debt basis beginning Remaining loss Debt basis ending Total $ 33, 000 $ 10, 000 $ 43, 000 205
239 Example: Restoration of Basis • F. When netting results in a negative number, debt basis is not increased by pass through items.
Example: Deducting Losses Against Debt K-1 Items Non-separately stated Income. Long-term capital gain IRC 1231 loss Non-dividend distribution Do we have a net increase? 239 Total $ 41, 000 $ 5, 000 $ -0$-46, 000
Example: Deducting Losses Against Debt K-1 Items Non-separately stated loss Long-term capital gain IRC 1231 loss Non-dividend distribution 239 Total $ 41, 000 $ 5, 000 $ -6, 000 $-46, 000 Do we have a net increase? No, no increase “Zero”
Example: Deducting Losses Against Debt 240 Beginning Basis Income Items Balance before dist. Stock Debt $ -0 - $ 33, 000 $ 46, 000 $ -0 - Distribution Balance before loss IRC 1231 Loss Basis End of Year $-46, 000 0 0 $ 33, 000 $ -6, 000 $ -0 - $ 27, 000
What if there are multiple debts? • If there are multiple debts and a net increase the increase is applied in the following manner. • H. Debt that was repaid gets increased first up to the amount of repayment or the net increase. • I. Anything remaining is applied based on the debts % of the total basis. 241242
243 188 Q. Open Account Debt Our Client , Inc. 10 K
243 188 Q. Open Account Debt Our Client , Inc. 10 KK 5 We can do this as long as the aggregate amount of debt outstanding at end of year does not exceed $25, 000.
243 Q. Open Account Debt Our Client , Inc. 25 K 10 K
VIII. Repayment of Reduced. Basis Debt • IRS is big on this issue. • You repay reduced basis debt- you have a taxable gain. • See example on page 245 243
247 XI. S Corp Capital Accounts • AAA- Accumulated Adjustments Account • E&P- C Corp earnings- page 249. • PIT- Previously Taxed income pre-1983 page 250. • OA- Other Adjustments Account. - tax exempt and federal taxes paid - 250
251 XV. Distributions Example on Page 251
• Who would like to recognize a “qualified dividend” to create an ordinary loss?
253 • Who would like to recognize a “qualified dividend” to create an ordinary loss? • Strategy for an S Corp that was a former C Corp. or merged with a C Corp and has earnings an profits.
253 • Who would like to recognize a “qualified dividend” to create an ordinary loss? • B. Make an election to by-pass AAA • C. Elect to make a ‘deemed” dividend. • Retained Earnings –Debt • Contributed Capital- Credit • Shareholder pay “dividend rate”
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