Have a Tax Question? Ask a Tax Expert
Hello and thank you for your question.
Consider yourself fortunate that you have a shareholder's basis worksheet.
The capital gains that you recognize increase your basis, as that basis increases and decreases with the income and deductions of the s-corp. If you have a loss coming from the s-corp, it will decrease your basis should you recognize it, noting that if you have no basis, your loss is not deductible.
No, you should not reduce your capital gains by your basis... If you have a capital loss upon wrapping up your s-corp, then you can offset capital gains with that capital loss. Form 1040 Schedule D will be of assistance to you.
Let's review now. You have a basis in your s-corp shares. Initially it was equal to your capital contribution to the s-corp, but then as time went on, your basis rose and fell with the s-corp's earnings and deductions showing on your Schedule K-1's. When you receive a final Schedule K-1, you know that there is no more s-corp activity, so you are ready to look at your final basis at that point. If you have basis left and there is no more money or assets in the corp that can be distributed to you, then you will have a loss. If you receive money or assets from the sale/disposition of your s-corp that exceed your basis, then you will have a gain.
IRC 1244 can apply to s-corps, meaning you may have an ordinary loss on your disposition as opposed to a capital loss. IRC 1244 is here:
With an s-corp you need very good documentation from day 1 if you are going to be able to substantiate your 1244 loss. From the above section, "In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss."
If you are not readily familiar with the concept of shareholder basis and your final computations, then I do strongly suggest you see a local tax professional. Hopefully IRC 1244 can apply. Without knowing any better, you could inadvertently cost yourself some money depending on the size of your s-corp and what is at stake. If we are talking $200 or something as opposed to $20,000 or $2,000,000, that of course makes a difference too.
Thank you again for your question!
Your basis is not part of the corporate tax return, it does not appear on your Schedule K-1, and in fact it is 100% up to you to track your basis (the corporation was just being nice by giving you your shareholder's basis statement). Quite honestly, and let this serve as a wake up call if you ever get another S-corp, YOU should have all the documents necessary to claim any gain/loss on a final distribution from your S-corp having known what your basis is from day one and having calculated and substantiated it yourself.
Each capital gain or loss, rather each transaction, is its own separate and unique self in the eyes of the internal revenue code. You shouldn't net two capital gains together prior to reporting them. Once reported, the rules for capital gains and losses will provide for netting and you'll see this on the tax return and Schedule D, but you yourself need to enter any gains and losses separately and individually in terms of data entry.
After your record all of your K-1 activity, you'll either have basis left or not. If you do, you have a loss, assuming you are not going to receive anything further from the s-corp. Your ending basis on that statement probably indicates that you have a loss here, and if so, you'll report this separate from the K-1 activity.
Look at your basis statement and your Schedule K-1. Does the $170,000 you received show as distributions from the S-Corp that are decreasing your basis on the statement and appearing on the Schedule K-1? If not, then it sounds like your basis was $20,000 and you received $170,000, implying a $150,000 gain.
Thank you again!
Thanks for bearing with me. The $170,000 shows up as a Section 1231 gain on both the K-1 and the shareholders adjusted basis worksheet. and the $20,000 is the total basis at the end of the year after the sale.
How do I report the $170,000 and the $20,000 basis on my tax forms?
Let me know if I ned to pay more - you are being very helpful!
That tells me that you have a gain of $170,000, which I did not know from above, but it says nothing of the distribution (what you received in cash) of $170,000. There are two different transactions therefore, the first is your gain, the second is your distribution, and both should show up on the basis statement and Schedule K-1. The first, the gain, increases your basis. The second, the distribution, decreases your basis. If, after both recognizing the gain and the distribution, your basis is then $20,000, it again sounds like you have a $20,000 loss to be reported separately from your $170,000 gain.
If the distribution does not show up on your Schedule K-1, and thus the $20,000 is your basis after only recognizing the 1231 gain but not the distribution, then you would have not only a $170,000 gain to recognize from your Schedule K-1, but you also would have received $170,000 in cash that exceeds your $20,000 basis by $150,000, producing yet another gain (ie... total gains would then be $320,000, or $150K for the final distribution in excess of basis plus the $170K Sec 1231 gain).
Remember too here that JustAnswers is for general answers only. I can teach you about gains/losses, etc., but I am not able to read your Schedule K-1, give proper review to your basis calculation, and continue to provide an accurate answer with respect to how you should personally prepare your taxes. I simply don't have the information or ability over JustAnswers, nor do I care for any liability online. Again, for what you are trying to get out of this and the money you are talking about here, I absolutely feel at this point that you should see a local tax professional.
Thank you one more time!