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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
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.
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