OldJack

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.

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:

1. The distribution may result in a tax-free reduction of the shareholder’s basis in the corporation’s stock,
2. a taxable dividend, or
3. *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.

10 minutes ago, BHoffman said:

Perhaps because it is my understanding that AAA ( not always the same as basis) is irrelevant unless E&P exists and I agree with Abby.   If the Corporation elected S from day one, then there is no E&P.  Please see the article below that gives a pretty clear explanation. 

https://www.forbes.com/sites/anthonynitti/2014/04/08/tax-geek-tuesday-are-those-s-corporation-distributions-taxable/#51ea0396a22e

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

@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?

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.

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! 

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.

>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.

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.

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)

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?

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.

If there had not been a trust it would be an "estate" income tax return 1041 with the taxpayers ss#.

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.

3 hours ago, Abby Normal said:

I think you misunderstand my clients.

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.

21 hours ago, Abby Normal said:

You put it in as capital, you take it out as distributions. Easy, peasy.

I think you misunderstand capital distributions.  When you have paid-in-capital, you have added basis to the shares of stock.  Even though it is shown on the financial statement separate from the other basis of stock (because of par value) it is for tax purposes an equal basis addition to the stock (like glue).  If you "take it out" you are actually distributing a fractional share of stock at fair market value, therefore any distribution would require a 1099 to report the FMV which is reported on 1040 Sch-D as capital gain or loss.  Determining FMV my require an outside appraisal.  Shareholder loan is easy, peasy to document and tax free to repay.  Also you may be ignoring the intent of the owner which is not your decision.

On ‎3‎/‎13‎/‎2018 at 10:54 AM, Abby Normal said:

I don't do shareholder loans. Always goes is as additional paid in capital.

Why in the world would you show a shareholder loan as paid in capital.  That is what the IRS would prefer.  A shareholder loan can be paid back anytime without question, paid in capital cannot.  A loan can pay shareholder interest, paid in capital cannot.  Why would you ignore the intent of the shareholder?

Well maybe you should ask your client to pay the CPA and get things finished so you have proper documentation to proceed.

"If I decide to move forward, and I get the client back in good graces with the various taxing authorities, I have a client for life"

True and you will be pulling for information every year as this client will not keep documents or adequate records.  He will drive you crazy at your busiest time.  lol 

Prepare all years of the 1120S and 1040 returns and give them to the tax payer to mail.  Do not efile anything for this client.  Your best option is to get rid of this client without doing anything.

Just to make a point.  The basis of the vehicle in the LLC might be zero but the important basis is what is the basis in the hands of the receiving partner.  Example, if this was the only asset in the partnership the basis would be whatever basis the partners basis in the partnership was.  True the depreciation basis when contributed to an S-corp would be zero due to related parties.  In this case even if the S-corp purchased the truck it still most likely has a zero basis for depreciation in the S-corp due to the rule of anti-churning.

If I was guessing I would say all the assets had been fully depreciated in prior years right or wrong but fully deducted.  If I did his taxes it would only be current and forward from current information.  Let the past be the past.

David, You are confusing inside basis with outside basis.  The partnership books would show that the partner has $400 basis per your example but the Partner as an individual (his 1040 tax return) only has a basis of $100.  If the partners share of losses, as an example, was $400 loss he would have a zero basis as far as the partnership books was concerned but he could only deduct $100 loss on his 1040 and resulting personal basis therefore zero.  Remember that in any organization other than a proprietorship there is always and inside basis and an outside (personal) basis.  A partnership is complicated. lol

On ‎7‎/‎13‎/‎2017 at 6:03 AM, Edsel said:

Whatever happened to "Inside Basis" and "Outside Basis?"  Do I have this confused with something else?

"Outside" basis is tracked by the partner and not the partnership.  It retains its original cost and accumulated depreciation at the time of the asset contribution.  The depreciation continues for the duration of its remaining depreciable life."

*Agree there are always inside basis and outside basis in ANY organization other than a proprietorship.

"Inside" basis is tracked by the partnership and not the partner.  It is recorded on the books of the partnership at its FMV at the time of the asset contribution, which is usually higher than the adjusted book value of the asset on books of the partner.  The partnership applies depreciation on the FMV as if it had been purchased from a disinterested party."

*I disagree with the partnership depreciation at FMV.  That would result in the partner K-1 under reporting taxable income.  The recording of FMV is to show agreed value of partnership ownership and reporting of income/loss. Example: Partner-1 contributes 100,000 cash, Partner-2 contributes Equipment valued at 100,000 (book value 10,000) for 50-50% ownership and 50-50% profit/loss. Partnership 1065 depr is only based on $10,000 due to non-churn rules.  Remember a Partnership is only 2 or more proprietorships.

"Am I cornfused about the treatment described above?  Won't be the first time...does the treatment differ for an LLC if reporting as a partnership?"

*LLC is disregarded, taxed status rules.  If its 2 or more its taxed as a Corp or Partnership.

 

I would, in most cases, state that the taxpayer is the one that determines what is ordinary and necessary for his business.  After all it is his business and his tax return.  If the expense is material and questionable the taxpayer should be advised by the preparer and if the taxpayer insist on deductible then preparer should withdraw from the preparation.