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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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If a long-time S-Corporation shareholder takes a distribution

Resolved Question:

If a long-time S-Corporation shareholder takes a distribution in excess of stock basis (no debt basis), the distribution will be reported on Schedule D as long term capital gain. Since this distribution is taxable, does this mean it does not decrease the stock basis?
Submitted: 4 years ago.
Category: Tax
Expert:  USTaxAdvising replied 4 years ago.

That's right. Exactly. When you take a distribution from an S-corporation or partnership and have no inside or outside basis (and no debt basis) then the distribution would be a gain, generally long term (depending on the holding period). As such it is reported on Schedule D.

 

Since this distribution is taxable, does this mean it does not decrease the stock basis? Exactly. This non dividend distribution does not decrease the stock basis further, it is treated as a long term capital gain.

 

I hope I have provided the clarity you were looking for, please let me know if you have any further questions.

 

Best regards,

Customer: replied 4 years ago.

I understand the above, but it still doesn't help me see the whole picture. Here's an example: Beginning of year stock basis is $6,454. Operating loss for the year is ($40,704). Distribution to shareholder was $14,431. Non deductible expenses are $304, (meals=$134, penalty=$170). Nothing else to report on K-1 except for S-Corp officer medical insurance premiums included in W-2.

 

On Form 1040, Sch D, Part II I have shown "Shareholder Distribution", sales price $14,431, cost or basis $6,454, gain $7,977. I don't understand how, or if, this affects the calculations on Form 6198 At-Risk Limitations. Since this distribution is taxable shouldn't it be entered on Form 6198 Part I, line 2a, thereby allowing the taxpayer to utilize $7,977 of the otherwise suspended loss?

Customer: replied 4 years ago.
I still haven't gotten an answer to the above.
Expert:  USTaxAdvising replied 4 years ago.
Sorry but I am on the road at the moment and will have to get back to you this evening. If you need an immediate response then I will have to opt out to let another expert assist.

I hope this works for you.

Best regards,
Customer: replied 4 years ago.
Ok, I can wait until this evening.
Expert:  USTaxAdvising replied 4 years ago.

Thanks for your patience.

 

Since the opening basis is 6,454 and the CY loss is (40,704) I get a distribution in excess of basis as 14,431 (the full amount). As we agreed above this would be a capital gain. The amount would be reported on line 16D of the 1120S K1 and would be reported on the shareholder's Schedule D of form 1040 line 12. Thus you would not complete the Schedule D or the 8949.

 

Regarding the 6198, I would not think this form would apply unless the shareholder had qualified debt loaned to the corporation. If that is the case then the loss may be allowed if the debt is from the shareholder personally. (not just the shareholder being liable for the debt).

 

I hope this helps. Please let me know if you have any further questions.

 

Best regards,

 

 

Customer: replied 4 years ago.

6/2/2012

 

I don't think this is quite right. I believe I am required to allocate the stock basis rateably between the non-deductible items, ordinary loss, and the distribution CG calculation. I'm going to go with this unless you disagree and can explain why this is not the right approach.

 

Thanks.

Expert:  USTaxAdvising replied 4 years ago.

Sorry, my gain calculation above is incorrect. I went back to confirm the ordering rules here. The distribution comes out of the basis prior to the loss. See link here and the "Stock Basis Example " - http://www.irs.gov/businesses/small/article/0,,id=203101,00.html

 

I hope I have provided the clarity you were looking for. The non dividend distribution is reported on the 1120S K1 Box 16 code D which flows to the Schedule D. There is no computation of "cost" or "proceeds" reported on the Schedule D or 8949.

 

Let me know if you have any further questions.

 

Best regards,

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