Description

Accurately calculating basis for S corporation shareholders is critical to determine how much a shareholder can withdraw in distributions without recognizing taxable income. When a shareholder takes more in distributions than his basis, the excess distribution is taxable as a capital gain.

Tracking basis is also important in determining whether shareholders can deduct S corporation losses on their personal returns. The Service may disallow pass through losses in excess of basis and result in unexpected tax consequences.

Critical to maintaining stock and debt basis balances is a clear understanding of required and elective adjustments arising from certain transactions and events. The IRS recently issued Practice Unit guidance on adjustments to stock and debt basis under Section 1367, indicating that S corporation basis will continue to be an area of audit attention in 2018.

The Service has identified several problem areas in S corp basis adjustment calculation and reporting. Common errors include failing to account for income or loss not claimed on a tax return, improperly structuring debt transactions, and adjustment for certain tax credit bonds. The IRS has prevailed in recent Tax Court cases that upheld disallowance of debt basis increase.

Listen as our experienced panel provides a thorough and practical guide to Section 1367 stock and debt basis adjustments for S corporation shareholders to avoid unnecessary tax.