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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Tax Expert in Stockholders Basis in S- Corporation Only Calculating

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Tax Expert in Stockholder's Basis in S- Corporation Only Calculating Basis for a stockholder in an S-Corporation who only stockholder own 100% of the Corporation. There is no losses for tax basis only profit. There is an M-1 adjustment between book and tax on a Corporate Tax Return (1120S): Tax income is larger than Book income which is normal occurrence between tax and book, which is reflected in the M-1 Adjustments. Form 1120S Balance sheet (Equity) always reflects the Books Balance Sheet; only the Profit and Loss difference is accounted for in the M-1 Adjustment. One Example of this may be GAAP deprecation for Book Accounting compared to Tax Accounting depreciation (Timing Difference) or Meals 50% exclusion which is permanent. Questions: 1. Stockholder has a worksheet that controls the Outside Basis. The Initial investment documentation and yearly K-1’s from the S-Corporation should be all that is needed to keep track of Stockholders Outside Basis? 2. K-1 line 16c lists the Nondeductible Expenses that the S-Corporation was not allowed to deduct from Income. An example would include 50% of meal Expense exclusion? This would reduce the Stockholder bases? 3. Book Financial Statements expensed a newly purchased asset, and the tax return Depreciated the asset over 5 years. Therefore, more profit is reported on the K-1 tax return going to the stockholder; therefore increasing the tax liability and increasing outside basis. This would be reflected in the M-1 Adjustments and be reflected on the K-1 line 16c nondeductible expense; because this is just a timing issue and the K-1 higher income would reflect the increase in basis? 4. M-1 adjustments is accounted for on the outside basis by increasing the basis as reflected in the increase in income on K-1, line-1 Ordinary Income or line 2, Rental Income, or by decreasing the stockholders basis reflected on the K-1 Line 16c nondeductible expenses (50% meal exclusion) ? 5. If the K-1 to Stockholder shows higher taxable income than Book Income, which is reported on stockholder Personal Tax Return, with no 16c nondeductible expenses. As a result of this K-1 Income being higher; the Corporation’s Books Equity Basis should be lower than the Stockholder Outside Basis Control Sheet. 6. Would it be safe to say if the K-1 is reporting Income; line (1) Ordinary Income, line (2) Net Rental Real estate income, and if there were M-1 adjustments showing higher taxable income than book income, and there were no K-1 line 16c nondeductible expenses; this will always increase the Stockholders Outside Basis???

 

#3 QUESTION WAS WRITTEN IN ERROR ...HERE IS THE CORRECT QUESTION:

  1. Book Financial Statements expensed a newly purchased asset, and the tax return Depreciated the asset over 5 years. Therefore, more profit is reported on the K-1 tax return going to the stockholder; therefore increasing the tax liability and increasing outside basis. This would be reflected in the M-1 Adjustments and would not be reflected on the K-1 line 16c nondeductible expense; because this is just a timing issue and the K-1 higher income would reflect the increase in basis?
Submitted: 10 months ago.
Category: Tax
Expert:  taxmanrog replied 10 months ago.
Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

Your basis in the corporation is maintained on a tax basis, meaning that items on the tax return are what affects it. There are many items that increase basis, including ordinary income, net income from rental activities, net portfolio income, net gain under Section 1231, tax exempt interest/dividend income, gains from disposal of §179 assets, and oil & gas depletion in excess of basis. Items that decrease basis include nondeductible expenses, oil & gas depletion, ordinary loss, net loss from rental activities, net portfolio losses, charitable contributions, IRC §179 deductions, deductions related to portfolio income or loss, investment interest expense, foreign taxes, IRC §59(e) expenses, prior year losses in excess of basis, and of course, property distributions (cash is considered property, so cash distributions also). All of these items are PERMANENT differences, and affect basis.

So, to answer your questions:

1) Yes, you keep track of the basis by reference to your K-1 every year. It contains all the information you need to adjust your basis every year.

2) 16c is non-deductible expenses. These reduce your basis in the corporation, even though they are not deductible. They are permanent, rather than timing, adjustments, so they affect basis. The M-1 adjustments that are permanent, including the 50% M&E deduction, are the ones that you look at.

3) If the item is expensed for book but depreciated for tax, the tax income would be reflecting the depreciation every year, and book would not, so there is no adjustment, as this is a timing difference only.

4) The income reported on the Schedule K-1, lines 1 (Ordinary Income) or line 2 (Rental income) will add to (if income) or reduce (if loss) the basis in the company. Don't worry about the M-1, these lines are what matters. Look at the first paragraph of this answer to see what increases and decreases basis.

5) The amount on the Schedule K-1 is ALWAYS the amount that you pick up on the personal tax return. You also look for the other items - Interest income, dividend income, gains, losses, §179 deductions, charitable contributions, investment/portfolio expenses, foreign taxes, etc. - as these are all items that will flow through to your tax return. An S-Corp is a flow-through entity, so all items maintain their character when flowing through to the personal tax return.

6) This would only be true if there were also no distributions during the year. The income on the K-1 found on lines 1- 10 all increase basis if they are positive (income) items. Losses decrease basis. So if there were positive income on lines 1 & 2, and no nondeductible expenses or other items on Line 16, AND no deductions on line 12, AND no Items in Lines 12, 13, or 14, then yes, you will have an increase in stockholder's basis.

The stock basis calculation is always very difficult. Other items that affect basis are loans by the stockholder to the corporation. Loans to the corporation INCREASE basis, payment of those loans back to the shareholder REDUCE basis, and also possibly may result in taxable income to the shareholder for any gain on the repayment.

I hope this answers your questions! If you have any more, please feel free to ask! If you have found my answer helpful, please rate me highly! I would appreciate it!

Have a great holiday weekend!

Roger
Customer: replied 10 months ago.

Thanks you for your answer…..I need one clarification. I will tip you $20.00 since this was a long question.


 


The M-1 is sort of a Control Point. What if a prior year tax return had M-1 adjustment that reduced an expense for tax, over 3 years ago, created a larger tax payment to the IRS; and later is was discovered the expense could have been used to reduce the profits, in which increased the stockholders outside basis as a result of paying more taxes. I would think since the IRS received more taxes from the stockholder, because of not taking all the deductions allowable, in which increased the basis of the stockholder 3 years ago; the basis does not have to be decreased or reversed?

Expert:  taxmanrog replied 10 months ago.
You say that the M-1 adjustment reduced an expense for tax, are you talking about an item such as Meals & Entertainment? Or officer's life insurance? Or penalties? So the M-1 entry INCREASED taxable income, forcing the Shareholder to pay more in tax?

Please clarify. Also, if it is 3 years ago, could the return be amended to correct this?

Please let me know.

Thanks!

Roger
Customer: replied 10 months ago.

Hello....


The M-1 Adjustment was a result of Deposit Reconciliation for a tenant who deposit was not large enough to cover the damages. Somehow in the rush or miscommunications it was decided to eliminate these excess damages expenses, larger than the security deposit for tax. These repairs were ordinary and necessary expenses, and were paid by the Corporation, and eliminated for tax, increasing the K-1 income, in error paying more taxes than should have been paid. This increased the k-1 income and the stockholder paid higher taxes, and therefore increasing the Stockholders outside basis. This was not Meals & Entertainment, officer’s life insurance or penalties; they were ordinary and necessary expenses in which are allowable expenses. The 3 years statue has passed.

Expert:  taxmanrog replied 10 months ago.
The basis should have been reduced by the expenses that were paid. By electing not to take an allowable expense, then not amending it within the three year statute of limitations, you in effect made it a permanent difference. A permanent difference is treated the same way as a non-deductible item. It reduces the basis by the amount that should have been deducted. It is a shame that you got the incorrect advice, then were unable to fix it in before the statute of limitations ran out.

I am sorry, I wish I had a better answer for you, but this is the correct one.

Again, if you have any further questions, please let me know. It was a pleasure answering this one!

Have a great weekend!

Roger
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 377
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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