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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:
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?
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.