Cost Basis on S Corp shares

[Anjin San]

I own some shares in a family timber company organized as an S Corp and the company will be liquidated and its land sold this year…the proceeds will likely be distributed to shareholders via line 8a on the K-1 as net LTCG. I have the IRS rules for determining the cost basis for my shares but am unsure how to deduct the cost basis. Is subtracting them from the net LTCG line 8a on the K-1 and then entering that number into TurboTax the correct procedure of do I need to enter them someplace else? I see that whatever I enter on the K-1 gets passed through to the Schedule D as Net LTCG so subtracting the basis and entering that instead of the K-1 number seems right…but I'm not sure.

[Mike9241]

With a corporation that has always been an S-corp and for which you never received shares by way of inheritance or gift, your tax basis changes every year based on your allocations of income, deductions/losses, distributions, contributions to capital, loans made and repayment of those loans. So if you know your tax basis at the end of 2023,  

then for 2024 add k-1 income, contributions to capital and loans you made to the company 

subtract k-1 losses, deductions and any loan repayments 

this is your tax basis ignoring distributions

your selling price is the distributions for the year (to make things easy  - though some would say to subtract from basis all distributions but the final one - then the final one becomes the sales price).

this is reported in the sales/disposal section of the k-1. 

In most cases the the sales price should equal your tax basis. so no gain or loss. but things like rounding, gifts, inheritance and certain other situations can result in them being different. 

since you'll be receiving distributions completion of form 7203 will be required.  this recaps changes in your tax basis for the year. 

the sales price and cost basis form the Turbotx section will flow to form 8949 with type F - neither sales proceeds nor tax basis (1099-b) reported to IRS 

[Anjin San]

Thanks Champ…I need to explain the situation better. About 75 years ago 5 brothers including my grandfather established a partnership and bought land because they were timber harvesters. They did this until they retired, then established a C Corp in the 60s that they owned and family continued the business harvesting timber and added renting land for a hunting lease. The C corp shares were owned by my parents and were turned into S Corp shares in 2007 that then were inherited by me. No share value has ever been calculated by the company. C Corp profits were distributed as dividends and we put them on our individual tax returns. On becoming an S Corp the profits were distributed as Net LTCG on line 8a of the K1s we got every year…I've owned the shares since the same year it became an S Corp. Turbotax never told me to fill out the 7203 so it never got filled out although I do still have all of the K1s. The company will sell the land, close the company, and distribute the proceeds this year. Previous dividends and then LTCG of the S Corp were a couple thousand a year but the sale of the land will result in about $250K of Net LTCG this year. 

It is my understanding that the cost basis of my shares (once I calculate it via the formula I found on the IRS page) should reduce the amount of net LTCG and thus tax liability. Is this not correct? If it is…I'm just wondering where to put the cost basis into TurboTax so that it will reduce the actual LTCG that gets taxed. If it isn't correct…then why would shareholders even. care about a cost basis at all?

According to the company management…the proceeds will be distributed on the K1 line 8a as Net LTCG as usual and the shares we hold will not be sold to anyone, they'll just become worthless as the company won't exist anymore.

Given all of that…

1. I can fill out the 7203 for 2024…but since it never got filled out before how does one go about figuring out what the actual cost basis for 2024 should be from all the annual updates? Do we need to file 17 years of revised tax returns to add all of the 7203s?

2. I can figure out with a spreadsheet. what the 2024 basis should be since I've got all of the K1s…that. part is simple arithmetic…but if it reduces the effective LTCG how does that get incorporated in TurboTax. If I just put in the net LTCG on the K1 in the app it passes the total value through to Schedule D and there's no place for cost basis. The only thing I can figure out to do is (a) ignore the cost basis altogether and pay taxes on the entire distributed sales proceeds or (b) reduce the net LTCG on the printed K1 by the cost basis and then enter that into the K1 in the app which would then only add the reduced value to the Schedule D and the tax calculations.

Or…am I completely misunderstanding this…that's certainly possible.

[Mike9241 · Accepted solution]

I'm not understanding something you say the S-Corp election was made in 2007 and were owned by your parents. then at some point afterwards(?) they died and you inherited some or all of the shares.

the confusing part is you also say you owned share since the election was made which seems to contradict the prior sentence.

shares you inherited start off with a tax basis of their Fair Market Value on the date you inherited them which would be the date of death of each parent for the shares that you inherited from each.  You'll need professional help in determining those values. From there tax basis goes up and down depending on what each k-1 you get shows.  

If you don't do this, you likely misreport what your actual gain loss is upon liquidation of the corporation.  

Put another way your outside tax basis is likely not the same as the book value of those shares. 

[Anjin San]

Thanks all…problem solved between suggestions here and some info I received from the CPA at our financial advisors company. I'm all set.