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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 373
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Taxmanrog CPA only Stockholder took a cash distribution

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Taxmanrog CPA only

Stockholder took a cash distribution from the S-Corporation larger than profits this year. Exactly were on Schedule D is the S-Corp Distributions in Excess of basis (Long Term Capital Gain) reported???? I’m assuming you insert somewhere on Schedule D: S-Corporation Distribution in Excess of basis (Long Term Capital Gain)?????

The S-Corporation K-1 to stockholder will only show the Cash Distribution and nondeductible expenses etc.???. It is the responsibility of the Shareholder to put all the numbers together and to have an accounting of Basis???? Therefore the S-Corporation does no reporting on the stockholder taking excess basis since it is controlled by the stockholder???
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!

When a shareholder or partner takes all the basis out and then some, the excess is a taxable capital gain—often an unwelcome surprise to shareholders accustomed to receiving distributions tax-free.

Per Internal Revenue Code ("IRC") §704(a)(2) and §1367(a)(2) basis can never fall below zero. If there has been a distribution in excess of basis, then gain has to be recognized on the distribution. This gain is not reported on schedule K-1. The partner/shareholder reports the gain on their tax return.

Per IRC §1368, the treatment of a distribution in excess of stock basis depends upon whether or not the S-Corporation has any earnings or profits from when it was a C-Corporation.

 

If there were no earnings and profits, then any amount distributed in excess of stock basis is considered gain from the sale or exchange of property according to IRC §1368(b)(2). The character of the gain is dependent upon the holding period of the S-Corporation stock.

 

So, you would report the gain first on Form 8949 Part II for Long-Term (assuming that you owned the S-Corp for more than a year). You would write "S-Corp Distribution in Excess of Basis" in the description (column A), put the date the S-Corp was incorporated (column B), the date of the distribution in Column C, the amount of the distribution in excess of basis in Column D, and zero in Column E. The gain is the distribution in excess of basis and is reported in Column H. The amount from Form 8949 goes on Schedule D.

 

The S-Corp K-1 should show the distribution on Line 16, with the code D. The nondeductible expenses would also go on Line 16, with the code C. The S-Corp does not show the basis calculation - it is up to each shareholder to maintain their basis. For my clients, I do provide basis calculations when I prepare the corporate returns. However, this is not required.

 

I hope this answers your question! If you have any more, please feel free to ask! I will be happy to assist you! If you have found my answer helpful, please rate me highly! I would appreciate that!

 

Again, thanks! Have a great weekend!

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 373
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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