Stock Basis In An S-Corporation?

[XrayDoc88]

Is it accurate to use Form 1120-S, Schedule M-2, line 8 of the Accumulated Adjustments Account as the starting stock basis at the beginning of the tax year?  Or does the stock basis have to be calculated another way?  Thanks!

[Anonymous_]

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@XrayDoc88 wrote:

Is it accurate to use Form 1120-S, Schedule M-2, line 8 of the Accumulated Adjustments Account as the starting stock basis at the beginning of the tax year? 

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I do not think so.

See https://www.law.cornell.edu/cfr/text/26/1.1368-2

@Rick19744 

[XrayDoc88]

I've been filing 1120-S tax returns since 2009.  You would think that somewhere in those filings it would have kept track of the stock basis.

Assuming that all debt/bills have been paid by the S-Corp, would the business checking account balance be the same as the stock basis of the corporation?  All income and expenses have been added and subtracted to that single account since I started the S-Corp.

[Anonymous_]

It depends but, regardless, you have to start with your initial capital contribution to the corporation.

Note the IRS guide:

[Rick19744]

The AAA would not be a good starting point for a number of reasons, which may or may not be applicable:

• AAA does not include capital contributions
• AAA may not always include all distributions, since it cannot go below zero as a result of distributions 
• Tax-exempt income does not flow through AAA

[XrayDoc88]

Thank you!  That IRS guide is very helpful.  However, I'm confused about one item.  The guide clearly states that "separately stated income items" from boxes 2-10 will increase a shareholder's stock basis.  My first K-1 from my S-Corp lists "interest income" on line 4.  According to the IRS document I would think I should add that amount to my stock basis.  But the K-1 also lists the only items that affect shareholder basis as my lines 16c and 16d.  The interest is listed at the bottom as "other information" line 17a.  It seems to me that the IRS instructions regarding shareholder basis for lines 2-10 contradict what TurboTax actually prints for line 17a.

Any advice?  Do you know if I should add interest to stock basis or not?

To confuse me even more, box 1 "ordinary business income" passes through to my personal taxes, but it is included in the stock basis.  Box 4 "interest income" also passes through to my personal taxes.  I pay full taxes on both box 1 and box 4, but why would box 4 be treated differently than box 1 for basis?  Please help.

[JulieS · Accepted solution]

Yes, you add interest income to your stock basis. 

When you refer to box 17A, I assume you mean Box 17A of Schedule K. Box 17A includes all investment income, not just interest and it is used to calculate your investment interest limits on Form 4852. It is not a contradiction, just a different use.

As for the pass through income, that is the foundation of shareholder's stock basis. The stock basis keeps track of income on which taxes have already been paid. The main use of the basis is to determine if distributions are taxable to the shareholder or are a return of principal. 

[Anonymous_]

Further, when there is a loss, basis in this context will determine whether or not that loss is deductible for the shareholder or whether the loss is suspended.

[XrayDoc88]

Thanks again.  The IRS guidelines clearly imply that you should include 1120S K-1 boxes 2-10 when calculating shareholder stock basis.  And I didn't realize that box 17A includes all investment income.  I now realize that box 17A is informational only.  It doesn't really say that you don't include that in shareholder basis.  BUT........................why on earth would box 16 say "Items affecting shareholder basis", and then NOT list any of the entries present in boxes 1-10, specifically box 4 "Interest income".  I trust your answers and will add box 4 to my basis; but is this just a poorly designed IRS form?  Perhaps it would make more sense to everyone if box 16 said "Additional items affecting shareholder basis".  Ugghh!

[DianeW777]

I agree. For some perspective, Box 16 is for specific items that affect the shareholders basis and not the same as Boxes 1-10. 

Boxes 1-10 are specifically items of income or loss.

Box 16 Specific Items: (Instructions Form 1120S-K1 page 13)

• Code A. Tax-exempt interest income.  Report on your return, as an item of information, your share of the tax-exempt interest received or accrued by the corporation during the year. Individual shareholders include this amount on Form 1040 or 1040-SR, line 2a. Generally, you must increase the basis of your stock by this amount.
• Code B. Other tax-exempt income.  Generally, you must increase the basis of your stock by the amount shown, but don't include it in income on your tax return.
• Code C. Nondeductible expenses.  The nondeductible expenses paid or incurred by the corporation aren't deductible on your tax return. Generally, you must decrease the basis of your stock by this amount.
• Code D. Distributions.  Reduce the basis of your stock (as explained earlier) by distributions, not reported on Form 1099-DIV, of property or money. This amount will include any amounts included in income with respect to new clean renewable energy, qualified energy conservation, qualified school construction, build America, or (for bonds issued after October 3, 2008) qualified zone academy bonds. If these distributions exceed the basis of your stock, the excess is treated as capital gain from the sale or exchange of property and is reported on Form 8949 and Schedule D (Form 1040).
• Code E. Repayment of loans from shareholders.  If these payments are made on a loan with a reduced basis, the repayments must be allocated in part to a return of your basis in the loan and in part to the receipt of income. See Regulations section 1.1367-2 for information on reduction in basis of a loan and restoration in basis of a loan with a reduced basis. See Rev. Rul. 64-162, 1964-1 (Part 1) C.B. 304, and Rev. Rul. 68-537, 1968-2 C.B. 372, for details.
• Code F. Foreign taxes paid or accrued.  Report this amount on Form 7203, line 46(a).

@XrayDoc88

[MikeDunn]

Did you ever get a response on this:

Assuming that all debt/bills have been paid by the S-Corp, would the business checking account balance be the same as the stock basis of the corporation?  All income and expenses have been added and subtracted to that single account since I started the S-Corp.

[XrayDoc88]

Yes, see above post by Rick19744.  The IRS guide, also posted above, was helpful.

[sjlocke]

So what is the simple answer?  Is the balance at the beginning of the year the basis?  I've got a loss this year, and TT is telling me my allowable losses are zero.  My basis on the 1120s worksheet is also 0.  It's something I've never had to worry about before.

So where do I come up with a number for that so I can take my losses?

And how does that pass through to my personal return?

ETA: The IRS form says: " That amount is then increased and/or decreased based on the pass-through amounts from the S corporation."

Ok, so basically all I need to do is add up all my passed through amounts over the years from my K-1s.  Since I have no losses prior to this year, it would be a good amount.  Is that right?

[DaveF1006]

 It depends on whether or not you have enough basis to claim the loss.  According to the IRS," If a shareholder is allocated an item of S corporation loss or deduction, the shareholder must first have adequate stock and/or debt basis to claim that loss and/or deduction item. In addition, it is important to remember that, even when the shareholder has adequate stock and/or debt basis to claim the S corporation loss or deduction item, the shareholder must also consider the at-risk and passive activity loss limitations and therefore may not be able to claim the loss and/or deduction item".

If your basis was zero in the beginning, then you did not have adequate stock basis to claim the loss.

S-Corp Stock and Debt Basis

[Mike9241]

you enter the k-1 in your 1040. With online Turbotax you'll probably need premier so the k-1 can be entered, Because a loss is showing on the K-1, the IRS is going to require you to complete form 7203 (computation of tax basis and allowable loss) and include it with your 1040. we have no idea of what your tax basis is if any. If you don't know, then consult a tax pro and bring all prior returns.