question about shareholder stock basis for S Corp ( I am the only owner of the S Corp)

[Nihao]

Last year, the ordinary business income for my S Corp was $50000 which was passed through to my personal income in K-1. Why does $50000 appear as shareholder stock basis for this year in TurboTax Business? I thought the shareholder stock basis should be 0 for this year since the income of the S Corp for last year has been passed to myself. 

[Mike9241]

your basis is any capital you contributed + any undistributed income. income is not distributed because it is reported on reported on your return. it only is distributed when the S-Corp makes a distribution of cash or property to you.

look at the S-corp's schedule L at the beginning of the year. What's the total line 19 plus the total for lines 22 through 26. that's likely your tax basis at the beginning of the year.  Any distributions in 2022 reducing your basis would appear on the k-1 line 16 and would also show in the M-2 column a line 7 

[Nihao]

I guess I made a small mistake not declaring the distribution of $50000 on line 16 of K-1 last year. But I guess this is not a fatal error since tax has been paid on personal level, right?

how to remedy it for this year?  Can I just manually change the shareholder beginning base from $50000 to $0 for this year? I am the only shareholder of the S corp.

[Rick19744]

A couple of comments:

• Based on your facts, that means your prior year form 7203 is incorrect.
• Adjusting the beginning of the year to what it should be could lead to an IRS notice because prior year ending does not match current year beginning.
• Hopefully if you adjust prior year form 7203 line 6 for the $50,000 you still have basis?
• Additionally, what was reflected on the prior year Sch M-2 column (a) line 7?  Did this reflect your distribution?

[Nihao]

There is no form 7203 at all on TurboTax business for 2022 (last year)

and M-2 line 7 is 0 for 2022

Maybe what I can do is to keep the shareholder beginning basis as $50000 this year, and distribute $50000 this year. If I understand correctly, the $50000 distribution this year has no tax obligation since tax for it has been paid last year, right? Just would like to make sure there is no additional tax for distributing $50000 this year.

Regards 

[Rick19744]

Follow-up to your response:

• Form 7203 is completed with your personal tax return.
  • This was technically required since you had a distribution from the S corp
  • This also provides a standard basis schedule for the IRS to follow
• Based on your reply, your 2022 1120-S is not correct if you don't have the $50,000 reflected on the M-2.
• This makes sense if it also wasn't reported on the K-1 as you indicated in your original question.
• I can't tell you if the distribution of the $50,000 has no tax implications.  I don't know what else was reflected on the K-1.
• If the $50,000 of ordinary income was the only item reflected on the K-1, then you are correct in that there is most likely no tax implications.
• Correcting a prior year mistake on this years tax return is not really how this should be handled.  Should you win the audit lottery, then that means you have 2 returns that would need to be corrected instead of just the one.
• Additionally, we can't tell you what the implications of "correcting" the distribution in the current year as we have no idea of the S corp income, deductions, distributions etc for 2023.
• My advice is the following
  • I would file an amended 1120-S for 2022.
  • This would allow the beginning AAA to agree to the prior year ending balance
  • You will also need to consider amending your personal tax return if you did not include form 7203 or reflect the distribution on the K-1.
  • Doing so will also ensure that the ending basis reflected on form 7203 agrees to the beginning basis on form 7203 for 2023.  Even if you don't meet the technical requirements requiring you to completed this form, I highly recommend you complete it annually as somehow you need to maintain a basis schedule.
  • Doing the above will minimize any potential red flags 

[Nihao]

I found the following from IRS site 'If a shareholder receives a non-dividend distribution from an S corporation, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis.'

So, I will distribute $50000 to myself this year since beginning share basis is $50000, instead of amending last year's tax. Certainly I will also distribute new income from this year.

hope it is OK

[Rick19744]

Final comments:

• Don't disagree at all with what the IRS website says.  However, we don't know what else is on the K-1; such as separately stated items.
• As noted previously, correcting an omission of prior year distributions and including them in the current year is not the technically correct method to fix your issue; for either the corporate return of your personal return.  Just keep that in mind.