1. Ch 12 S Corp Basis Overview
221
Ch 12 S Corp Basis Overview
Basis from Stock and Loans
2014 Rules for Loan Basis
Operation how basis is used and restored
Accounting for Capital Accounts

2. S Corp Basis Overview 221 Stock basis- used first Then Debt Basis
The must be separately accounted for.
How basis gets restored is based on if there is an overall “net increase” or not.
Basis calculation is required with the return when a loss is deducted.
The Shareholder has the responsibility for determining basis.

3. E. Order of Basis Adjustments
173
225
E. Order of Basis Adjustments
Basis + Income Items - Distributions - Non deductibles - Loss Items

4. F. Elective Ordering Rule (Reg. 1.1367-1(g)
173
225
F. Elective Ordering Rule (Reg (g)
Basis + Income Items - Distributions - Non deductibles - Loss Items
Would you like to change?

5. F. Electing Ordering Rule Example
226
F. Electing Ordering Rule Example

6. F. Electing Ordering Rule Example
226
F. Electing Ordering Rule Example

7. F. Electing Ordering Rule Example
NIM
F. Electing Ordering Rule Example
Without the Election- Year 2
Sus.
Loss
Current Year
Allow
Carryforward
Nondeductible
$3,500
Deductible
$4,500
$14,000
$18,500
Total
$17,500

8. F. Electing Ordering Rule Example
NIM
F. Electing Ordering Rule Example
With the Election- Year 2
Sus.
Loss
Current Year
Allow
Carryforward
Nondeductible
$1,000
$3,500
$4,500
Deductible
$14,000
$18,500
Total
$17,500
$23,000

9. F. Electing Ordering Rule Example
NIM
F. Electing Ordering Rule Example
With the Election- Year 3 Gain of $5,000
Sus.
Loss
Current Year
Allow
Carryforward
Nondeductible
$4,500
$3,500
$8,000
Deductible
$18,500
$5,000
$13,500
Total
$23,000
$21,500

10. F. Electing Ordering Rule Example
NIM
F. Electing Ordering Rule Example
With the Election- Year 3 Gain of $20,000
Sus.
Loss
Current Year
Allow
Carryforward
Nondeductible
$4,500
$3,500
$1,500
$6,500
Deductible
$18,500 $0
Total
$23,000
$17,500

11. Not Enough Basis? Comment Contribute cash to corp. Contribute property
Buy shares
Make loans to the corporation

12. 233
Debt Basis
Final Regulations use Bona Fide debt standard rather than “actual economic outlay.
Guarantees are still based on the “actual economic outlay” standard.

13. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

14. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

15. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

16. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

17. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

18. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

19. Old Standard 233 S1 Corp S2 Corp Cash -0- Cash $100 K Loss 100 K
Income $100 K
Client
Basis In S1 $0
Basis in S2- $100K

20. New Standard – Bona Fide Debt
233
New Standard – Bona Fide Debt
S1 Corp
Cash -0-
Loss 100 K
S2 Corp
Cash $100 K
Income $100 K
YES
Client
Basis In S1 $0
Basis in S2- $100K

21. Bona Fide Debt Standard
233
Bona Fide Debt Standard
The following work
Example 1- Bona Fide Loan from Shareholder
Example 2- Guarantees remain unchanged
Example 3- Back to Back Loans
Example 4- Loan through distributions.

22. Bona Fide Debt Standard
235
Bona Fide Debt Standard
B. The James Maguire, et us vs. Comm- TC Memo
Lead to the 2014 debt regulations.
Taxpayers owned a finance company and an auto dealership.
Finance company earned a profit while the auto dealership operated at a loss.

23. Bona Fide Debt Standard
235
Bona Fide Debt Standard
B. The James Maguire, et us vs. Comm- TC Memo
Taxpayers had basis in the finance company but no basis in the auto dealership.
Taxpayers took a distribution of AR from finance company- at FMV
Contributed the AR to the auto dealership.

24. Bona Fide Debt Standard
235
Bona Fide Debt Standard
B. The James Maguire, et us vs. Comm- TC Memo
IRS disallowed the loses
Court sided with the taxpayer
Note: QSub or used of LLC sub could have fixed this also.

25. Bona Fide Debt Standard
235
Bona Fide Debt Standard
C. Hargis, TC Memo
In 2009 and 2010
Taxpayer was the co-borrower on loans
Arkansas state law holds co-borrowers as directly liable for the loans.
All indebtedness and payments ran directly through the company.
Including loans from related party LLCs.

26. Bona Fide Debt Standard
235
Bona Fide Debt Standard
C. Hargis, TC Memo
Court held that none of the loans increased basis.
4. Court cited lack of evidence in with regard to the LLC loans to the company.

27. The lender intended to make a loan to the taxpayer, however the loan documents indicated the taxpayer’s S Corp is the borrower. The taxpayer used the loan for basis to deduct losses. In the case the Court sided with:
The taxpayer- thanks to the testimony of Bank’s lending officer.
With IRS, because the Court found there was insufficient evidence to find the loan was made to taxpayer.
Answer: B- The Court sided with IRS. Page 236. D.

28. Bona Fide Debt Standard
236
Bona Fide Debt Standard
D. Tinsley, TC Summary Op
In 2006, the corporation took out loans with the shareholders as the guarantor.
Four years later the corporation was liquidated. Taxpayers took loss.
The year after the liquidation, the loan was renewed.

29. Bona Fide Debt Standard
236
Bona Fide Debt Standard
D. Tinsley, TC Summary Op
Both the bank and the taxpayers intended the loan to be to the “taxpayers”.
However the loan documents were still in the name of the defunct corporation.
Finding: Court found there was insufficient evidence to find the loan was from Tinsley.

30. Bona Fide Debt Standard
236
Bona Fide Debt Standard
E. Phillips, TC Memo
Question: Was a judgement against the taxpayer an economic outlay.
Phillips was a real estate developer who had fallen on hard times.
All notes were forced to a judgement
Phillips never made any payments on the judgement.

31. Bona Fide Debt Standard
236
Bona Fide Debt Standard
E. Phillips, TC Memo
Taxpayer’s argued that the judgements were “deemed capital” contributions.
Court agreed with the IRS.
Memo: it seems that this is more along the lines of a guarantee and even under the new regs. would not provide basis.

32. Deducting Losses Against Debt
237
Deducting Losses Against Debt
Once Stock basis is reduced to “Zero”
Loan basis is used.
Example Gary on this page.

33. Example: Deducting Losses Against Debt
237
Example: Deducting Losses Against Debt
K-1 Items
Total
Non-separately stated loss
$ -41,000
Long-term capital gain
$ 5,000
IRC 1231 loss
$ -6,000

34. Example: Deducting Losses Against Debt
237
Example: Deducting Losses Against Debt
Stock Basis
Total
Stock basis, beginning
$ 25,000
Add income items- gain
$ 5,000
Basis before loss
$ 30,000
Total losses $47,000
$ -30,000
Stock basis ending $
Total Loss is comprised of Non-separately stated loss $41,000 and 1231 loss of $6,000.

35. Example: Deducting Losses Against Debt
237
Example: Deducting Losses Against Debt
Debt Basis
Total
Debt basis beginning
$ 50,000
Remaining loss
$ -17,000
Debt basis ending
$ 33,000

36.
Restoration of Basis
C. If a ‘net increase” debt basis gets restored first, up to the outstanding amount as of the beginning of the year.
D. Net increase- income items exceed loss, deduction and distributions (pg. 239).
E. Capital contributions are not counted.
F. Otherwise the activity starts with stock basis until it hits “Zero”.

37.
Restoration of Basis
Warning: To track debt basis properly you must include the “opening debt balance” in the software.

38. Example: Deducting Losses Against Debt
239
Example: Deducting Losses Against Debt
K-1 Items
Total
Non-separately stated Income
$ 41,000
Long-term capital gain
$ 5,000
IRC 1231 loss
$ -6,000
Non-dividend distribution
$-30,000
Do we have a net increase?

39. Example: Deducting Losses Against Debt
239
Example: Deducting Losses Against Debt
K-1 Items
Total
Non-separately stated Income
$ 41,000
Long-term capital gain
$ 5,000
IRC 1231 loss
$ -6,000
Non-dividend distribution
$-30,000
Do we have a net increase? Yes not increase of $10,000.

40. Example: Restoration of Basis
239
Example: Restoration of Basis
The Rule: if you have a net increase then you restore debt basis first up to its outstanding balance as of the beginning of the year.
Outstanding balance as of beginning of year is $50,000.
Basis in the loan is $33,000.
The entire $10,000 is applied against debt basis.

41. Example: Deducting Losses Against Debt
205
Example: Deducting Losses Against Debt
Debt Basis
Total
Debt basis beginning
$ 33,000
Remaining loss
$ 10,000
Debt basis ending
$ 43,000

42. Example: Restoration of Basis
239
Example: Restoration of Basis
F. When netting results in a negative number, debt basis is not increased by pass through items.

43. Example: Deducting Losses Against Debt
239
Example: Deducting Losses Against Debt
K-1 Items
Total
Non-separately stated Income.
$ 41,000
Long-term capital gain
$ 5,000
IRC 1231 loss $
Non-dividend distribution
$-46,000
Do we have a net increase?

44. Example: Deducting Losses Against Debt
239
Example: Deducting Losses Against Debt
K-1 Items
Total
Non-separately stated loss
$ 41,000
Long-term capital gain
$ 5,000
IRC 1231 loss
$ -6,000
Non-dividend distribution
$-46,000
Do we have a net increase? No, no increase “Zero”

45. Example: Deducting Losses Against Debt
240
Example: Deducting Losses Against Debt
Stock
Debt
Beginning Basis $
$ 33,000
Income Items
$ 46,000 $
Balance before dist.
Distribution
$-46,000
Balance before loss
$ 33,000
IRC 1231 Loss
$ -6,000
Basis End of Year
$ 27,000

46. What if there are multiple debts?
What if there are multiple debts?
If there are multiple debts and a net increase the increase is applied in the following manner.
H. Debt that was repaid gets increased first up to the amount of repayment or the net increase.
I. Anything remaining is applied based on the debts % of the total basis.

47. 188
243
Q. Open Account Debt
Our Client , Inc.
10 K

48. Q. Open Account Debt 188 Our Client , Inc.
243
188
Q. Open Account Debt
Our Client , Inc.
5 K
10 K
We can do this as long as the aggregate amount of debt outstanding at end of year does not exceed $25,000.
Note on page 208- item 5- if the debt exceeded $25,000 on 8/20/08. You are stuck with this also.

49. 243
Q. Open Account Debt
Our Client , Inc.
25 K
10 K

50. VIII. Repayment of Reduced-Basis Debt
243
VIII. Repayment of Reduced-Basis Debt
IRS is big on this issue.
You repay reduced basis debt- you have a taxable gain.
See example on page 245

51. XI. S Corp Capital Accounts
247
XI. S Corp Capital Accounts
AAA- Accumulated Adjustments Account
E&P- C Corp earnings- page 249.
PIT- Previously Taxed income pre page 250.
OA- Other Adjustments Account.- tax exempt and federal taxes paid - 250

52. 251
XV. Distributions
Example on Page 251

53. Who would like to recognize a “qualified dividend” to create an ordinary loss?

54. 253
Who would like to recognize a “qualified dividend” to create an ordinary loss?
Strategy for an S Corp that was a former C Corp. or merged with a C Corp and has earnings an profits.

55. B.Make an election to by-pass AAA
253
Who would like to recognize a “qualified dividend” to create an ordinary loss?
B.Make an election to by-pass AAA
C. Elect to make a ‘deemed” dividend.
Retained Earnings –Debt
Contributed Capital- Credit
Shareholder pay “dividend rate”