How to calculate shareholder basis in absence of historical data

[TallerWinset]

I gained approval from the IRS to switch my LLC, previously filing as a sole proprietor, to FILING AS an S-Corp beginning in the 2024 fiscal year and I must now calculate a shareholder basis for use in tax filings.

However, the situation is a bit complicated. My books prior to 2024 were handled by a business associate who mistakenly had various personal accounts connected to Quickbooks, along with the business accounts. This meant that there was excessive comingling of personal expenses/funds into the books and many wildly inaccurate numbers, especially in the balance sheet. I started the books over at the beginning of 2024 and consider the old books as useless. I am confident that I have assembled an accurate balance sheet for the new books as it is based on beginning balances that accurately reflect the actual assets and liabilities present at the end of 2023.

I understand the basic math of shareholder basis calculation (initial investment + owner investments and net income minus owners draws for each year). However, much of what I have read about calculating shareholder basis advises going back to day one of the business to calculate shareholder basis for each year all the way up to the present. In my case, that would mean slogging through ten years of inaccurate books to come up with a number I could only assume would be way off.

My question is, how can I approach calculating my shareholder basis in this situation? Particularly, is there a shortcut for arriving at a shareholder basis that ignores all the useless pre-2024 data?

Many thanks for any assistance you can provide.

[tagteam]

I'll page @Rick19744. Please check back here later.

[Rick19744 · Accepted solution]

You appear to have a fair high level understanding of the concepts, but you need to have a one on one with a tax professional.

There is too much detail lacking and a forum such as this is not conducive to addressing the issue.

But at a high level, you need to be able to separate the personal from the business assets on day one.

These items then become a contribution to the S corp on day one.  

Meet with a tax professional, invest the $$ to get started on the right track.

[TallerWinset]

Thanks Rick19744. I understand that I will likely need to engage the services of an accountant if the only option is to start the calculations from day one of the business. But I am curious if it would be possible, for the sake of general discussion, to gain an understanding of the options for calculating shareholder basis in my LLC if, say the books prior to 2024 had been destroyed in a fire. I am posing that hypothetical simply because the books are THAT bad.

I am also admittedly unclear about how calculating basis from each of the previous years could change things, other than to throw everything off due to bad data - the business assets as of December 31, 2023 are exactly what they are and are the direct product of the various cash injections, net income and owner draws across the years. Maybe I am missing something there that you could help me understand.

Also, just a reminder this is a simple, single owner LLC we're talking about here - the history goes back a decade but the business itself is quite simple.