K1 Payout?

[Possi]

New client has a K1 for an S Corp that he got out of last year. I have a pay stub that says "payout for 6% stock on book value as of today, 12-6-2019."

There is no reference to a payout on the K1, nor is there a reference to basis he had other than 6% ownership. 

There is ordinary income of $2634 and a little interest income. 

So, since there seems to be no basis, and he has not loaned the business any money, would this be a LTCG on Sch D with zero basis?

[Lee B]

Ask them how they received the stock ?

[Possi]

He never received stock. I think this is a rinky dinky play of an S Corp. They had an argument, he wanted out, and they wrote him a check. Honestly. 

[grandmabee]

He had to have stock in an S-corp.  What is his basis?  if none then yes taxable on schedule D.  But you can offset the amount of check by his basis.  If you have his K-1's from beginning you can reconstruct his basis.

[jklcpa]

Liquidating distribution for stock should have been reported on 1099-DIV.

Was K-1 generated from a computer program? He could ask if that program generated the basis calculation. Otherwise, if he has all K-1s, recalculation basis starting from the beginning based on what he invested and adjustments for each year's activity shown on his K-1s

[Possi]

I asked him if he loaned the business any money and he said no. He never even invested any money in the business. I just called him and we decided I would email him asking for any 1099B or 1099DIV that was issued for this distribution. He will forward that to the accountant. I'll also ask about basis. 

It was an ugly breakup and I get the feeling nobody is communicating with my (new) client. 

Before posting, I truly didn't even know what I needed from him since I knew he didn't advance any money. 

[Abby Normal]

His basis went up this year by the amount of income on the K1. If you enter it in ATX it will show basis increasing. Does the K1 show any distributions?

When you say 'pay stub' was it a payroll check or just a regular check?

If the corporation bought his stock (dumb move) then this is a capital gain, whether they did a 1099DIV or not.

Recreate the basis as Judy suggested. Too many lazy (or ignorant) preparers have not tracked basis. I wish the IRS would just create a form for it to force everyone to comply.

 

[Possi]

28 minutes ago, Abby Normal said:

His basis went up this year by the amount of income on the K1. If you enter it in ATX it will show basis increasing. Does the K1 show any distributions?

When you say 'pay stub' was it a payroll check or just a regular check?

If the corporation bought his stock (dumb move) then this is a capital gain, whether they did a 1099DIV or not.

Recreate the basis as Judy suggested. Too many lazy (or ignorant) preparers have not tracked basis. I wish the IRS would just create a form for it to force everyone to comply.

 

Are you saying I can add all of his K1 income for the years he was a member, and that becomes his basis? Or just this one year? 

It was a regular check. He as a W2 for about $85k. This pay doesn't appear to be from any regular payroll, though. Just a straight check.  

[jklcpa]

44 minutes ago, Possi said:

Are you saying I can add all of his K1 income for the years he was a member, and that becomes his basis? Or just this one year? 

All of the years. Start from the beginning; it's cumulative. Not just the income side of it; deductions, 179, distributions, etc all factor in too, and all in a specific order.  Here's a worksheet:

http://www.thetaxbook.com/updates/TheTaxBook/Client Tax Tools/S_Corporation_Shareholders_Adjusted_Basis_Worksheet.pdf

[grandmabee]

4 hours ago, Abby Normal said:

His basis went up this year by the amount of income on the K1. If you enter it in ATX it will show basis increasing. Does the K1 show any distributions?

When you say 'pay stub' was it a payroll check or just a regular check?

If the corporation bought his stock (dumb move) then this is a capital gain, whether they did a 1099DIV or not.

Recreate the basis as Judy suggested. Too many lazy (or ignorant) preparers have not tracked basis. I wish the IRS would just create a form for it to force everyone to comply.

 

I thought it was the individual shareholder's responsible to keep track of their own stock basis, not the Corporation.  So if the preparer of the Corp. tax return did not do the other shareholder personal tax return then it is on the shareholder to keep track.

[BulldogTom]

4 hours ago, Abby Normal said:

Too many lazy (or ignorant) preparers have not tracked basis. 

Easy now.   I resemble ...uh resent... that remark.

Tom
Modesto, CA

[Abby Normal]

1 hour ago, grandmabee said:

I thought it was the individual shareholder's responsible to keep track of their own stock basis, not the Corporation.  So if the preparer of the Corp. tax return did not do the other shareholder personal tax return then it is on the shareholder to keep track.

Corporations are just shareholders and as tax professionals (if we want to call ourselves professionals), we should do everything we can to track basis both on the corporate return and any individual returns we do. Shrugging and saying it's not my job is a dereliction of responsibility, in my opinion, because we all know shareholder have zero clue how to track their basis or even what that means.

Losing track of basis creates a lot of problems. The IRS made a huge mistake by not having a basis form as part of the K1 from the 1120S and as part of the 1040 Sch E page 2.

 

[Abby Normal]

6 hours ago, Possi said:

income for the years he was a member, and that becomes his basis?

Not just income. Deductions, nondeductible items and distributions all reduce basis. Just as contributions of capital, other income and notaxable income increase basis.

And it MUST be done year by year, because at the end of any year, if losses, deductions and/or distributions decrease basis to zero, and excess losses and deductions are carried forward, and any distributions in excess of basis are long-term capital gains (after the stock is held for at least 1 year).

[Possi]

On 4/10/2020 at 5:07 PM, jklcpa said:

All of the years. Start from the beginning; it's cumulative. Not just the income side of it; deductions, 179, distributions, etc all factor in too, and all in a specific order.  Here's a worksheet:

http://www.thetaxbook.com/updates/TheTaxBook/Client Tax Tools/S_Corporation_Shareholders_Adjusted_Basis_Worksheet.pdf

Thank you, y'all! I had no idea what I was getting into with this check issued. What a rat's nest. But, I'll get it unraveled. 

I have FIRST sent an email for client to forward to accountant. He just might have it, and he very well MAY have issued this information to client. 

God Bless y'all on this Easter Day and always!