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OldJack

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  1. There are 3 things to consider: 1. Is the asset included in the deceased estate for estate tax (706) purposes. 2. Is the asset included in the deceased fiduciary (1041) or personal (1040) income tax return. 3. Is the asset included for probate court distribution of assets.
  2. From the article referred to by BHoffman quote: >>S Corporation Distributions, In General Pursuant to Section 1368, a distribution of cash or property by an S corporation may give rise to three possible tax consequences to the recipient shareholder: The distribution may result in a tax-free reduction of the shareholder’s basis in the corporation’s stock, a taxable dividend, or *Gain from the sale of the stock (generally resulting in capital gain). << Item1: You guys are confused with adjusting the shareholders basis which I agree with Item #1. Yes AAA distributions and allocation of AAA income effect shareholder basis. Item2: If no E&P this is not an issue per my example. Item3. *This is the issue! Cash or Property Distribution in excess of the AAA from the Corp books is a Capital distribution at FMV the same as a sale of stock.. Example: Try to give stock as a gift without FMV gift tax classification transaction. Try to sell stock to related party at shareholders cost basis (IRS will give you a tax bill at FMV). Distribution of Property if no AAA balance is treated as a capital sale.
  3. AAA & E&P is the confusion. We are not talking about the distribution of S-corp income. We are talking about Capital distributions. OK example: S-corp never had a loss, No E&P, No cash, distributes all AAA income every year end and now liquidating "property distribution" of land with book value of $20,000 and FMV of $500,000. What is the tax to the shareholder with outside stock basis of $20,000. If it was a proprietorship it would be no tax effect but as a S-Corp or C-Corp?? Geez
  4. @Abby Normal Do you think the distribution of S-corp assets (ie: automobile) at cost basis are tax free distributions {hint it has to be at FMV}? S-corp status only pertains to AAA distributions and the effect it has on the shareholders personal taxes. A S-corp is a C-corp that has elected to be taxed under special S-corp statutes for current income attributes (AAA) only. Violate the S-corp statutes and you are automatically returned to C-corp status. Yes distributions of AAA account is tax free because the shareholder has to declare and pay the tax, but distributions in excess of AAA are C-corp dividends or C-corp capital distributions that was not passed through. The Corp must file 1099 for distributions in excess of AAA as such capital distributions are not AAA reported on the 1120s-Sch-K1. Basis for tax calculation is only at the personal tax level not at the corp level. A corp "book account of the AAA" can have a zero balance just not for purpose of the personal tax basis calculation. Tax Seminars don't teach accounting. Why aren't you people helping Abby understand?
  5. OK lets use a simple example. 1. Corp has from day 1 been an S-corp. 2. Corp issued 100 shares of "no par stock" for cash from sole shareholder for $10,000. ($100 per share) 3. Sole Shareholder contribute additional $10,000(*) capital in order to buy land. 100 shares Stock Basis $20,000, no par ($200 per share) 4. Corp has made a profit for rent every year and has distributed exact profit at year end. No AAA balance. No other assets except land. 5. Corp has land with $20,000 NBV and FMV of $500,000 due to location. (FMV 500,000/100=$5,000 per share FMV) 6. Corp distributes $10,000(*) capital to shareholder. (same as shareholder sells back to corp 2 share @FMV $5,000 for $10,000. 7. Taxable gain to shareholder: Proceeds $10,000 cost basis ( 2x$200) $400 = $9,600 taxable gain.
  6. I have no disagreement with what jayla248 posted. The adjustment of stock basis is at the level of the shareholders personal taxes not at the S-corp book accounts, although the corp may keep track of it for the shareholders. For taxation a S-corp is the same as a C-corp except for taxation of taxable pass-thru income/loss. S-corp distributions in excess of the AAA account requires a filing of a 1099-D showing a dividend or stock distribution-as the case may be. A corporate AAA book account may show a negative balance but not for purposes of personal shareholders deduction calculation. When “capital” is distributed it is at fair market value (appraisal value) of the Corp verses personal stock basis resulting in capital gain or loss at the shareholders personal stock basis (same as C-corp). [Example: book value of building is zero but market value is one million therefore FMV v. Stock basis=gain just like sale of stock] Contributions (paid in) to capital increase shareholders personal stock basis but cannot be returned (v. Loan) without being classified as “capital” distribution at fair market value. Paid-in-capital is shown as separate book account only to distinguish between par value stock accounting. Loans should be documented and never be capitalized as that is what the IRS wants to force capital gain tax when taxpayer decides to take his loan back without telling you!
  7. With regards to capital which includes paid in capital there is no difference between a C or S corp. S-corp is not a partnership where capital can generally be returned tax free. S-Corp distributions of “AAA profits” pass tax free is the ONLY difference from a C-corp. Distribution of S-corp capital is subject to capital gain the same as a C-corp.
  8. >They were never really loans, and I always catch them in the year they happen and record them as additional paid in capital. < Other than a convenience for you please explain the advantage for the owner/shareholder. Please explain how the owner gets his money back tax -free if he wants it from a C-corp. Please tell us it was the C-corp owner/shareholder that made the decision to capitalize.
  9. Capitalizing a shareholder loan to a C-Corporation is never a good idea as the shareholder can't just take the money back out tax free. Any distribution from an equity account has to be at fair market value of the corporation with taxable gain.
  10. 1040 Sch-E: You can deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership if you were required to pay these expenses under the partnership agreement. (Sch-E Instructions)
  11. What happened to the concept of preparing taxes based on documents presented by the taxpayer. How do we justify creating deductions by the paid preparer? If preparers can create a $10 deduction can they create a $10,000 deductions even though the taxpayer says so? Where do you draw the line? Is it the preparer's or taxpayer's return?
  12. If there had not been a trust it would be an "estate" income tax return 1041 with the taxpayers ss#. Edit: I stand corrected. Estate also must obtain a new TIN.
  13. If there had not been a trust it would be an "estate" income tax return 1041 with the taxpayers ss#.
  14. Hi jklcpa, the distributions we were talking about was paid-in-capital which becomes a part of stock basis rather than income accumulation (retained earnings). You are correct that distribution of accumulated retained earnings income is a different type of distribution. Paid-in-Capital is not Retained Earnings. From a tax standpoint there is no difference in distributing shares of stock or paid-in-capital. Both are Capital Distributions not distribution of earnings. S-corp distribution rules only apply to accumulated earnings.
  15. You may be right I don't know your clients, however, they are corporate shareholders and the rules for corporations are the same for all shareholders regardless if it is a C-corp, S-corp, or LLC electing corp status. Capital distribution is a taxable event.
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