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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Taxmanrog Only to answer this question... M-2 AAA ending balance

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Taxmanrog Only to answer this question...
M-2 AAA ending balance is now zero.
You stated the Shareholder Control Sheet basis has nothing to do with the S-Corporation reporting of shareholder basis.
I noticeD the Shareholder Control Sheet Negative Basis is larger than the AAA #3-Other Additions -to offset the ending balance to zero….I’m assuming this is alright.???
Submitted: 11 months ago.
Category: Tax
Expert:  taxmanrog replied 11 months ago.

Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

 

Yes, I usually put the distributions in excess of basis on line 3 of the AAA account, so that the ending balance on line 8 is zero. If you don't do this, the ending balance in the AAA account is a negative number. The AAA can be negative, but only from losses, which are suspended if there is no basis. The AAA account can not become negative (or go more negative) from a distribution in excess of basis.

 

Thanks!

 

Roger

Customer: replied 11 months ago.

Hi Roger....


The Shareholder Control Sheet Negative Basis that is reporting the Cash Distribution in Excess of Basis on Schedule D is larger than the AAA #3-Other Additions -to offset the ending balance to zero….Since the Shareholder is reponsible for keeping track of this....I’m assuming this is alright.???


 

Expert:  taxmanrog replied 11 months ago.

Is the Shareholder Control Sheet something from your tax program? I am not familiar with it.

 

Each taxpayer is responsible for maintaining his or her own basis.

 

You may have to override your tax program, as the distribution that is in excess of basis is the amount that should be shown on Schedule D of your personal return. This amount should be the same as the amount that you put on Line 3 of the Schedule M-2 in the AAA account. The Form 1120-S and the Form 1040 are different tax returns. TurboTax is not set up to run very complex tax returns, so you may have to do some fudging. I use a program called Lacerte, which is designed for tax professionals, and I still have to override and force things.

 

Let me know if you have any more questions. I will be offline while taking my son to school and running some errands, but I will be back later.

 

Thanks!

 

Roger

Customer: replied 11 months ago.

I also use Lacerte Tax Software.


Questions:



  1. Are we saying if an S-Corporation had 40 shareholders; the sum of the basis of each shareholder would equal M-2 line 8-ending balance?

  2. What if the Shareholder Loan the Corporation money; would this increase the basis of the shareholder which would not be accounted for in the M-2 AAA?

  3. Aren’t there other situations which are unique to each shareholder that would not affect the M-2?


Thanks Again….

Expert:  taxmanrog replied 11 months ago.
First, for question 1, yes, the sum of the 40 shareholder's basis should equal the sum of the M-2 ending balance.

Loans from a shareholder provide debt basis. That is tracked separately from Stock basis. Debt basis will allow a shareholder to deduct a loss in excess of stock basis, which makes sense because the AAA can go negative for losses in excess of stock basis.

If you use Lacerte, you know that the Basis Schedule tracks stock basis first, and after the stock basis is calculated, the debt basis is calculated. The shareholder's total basis is the sum of these two.

There are a couple of situations that would be unique to shareholders, but not many. These would mostly included loans to the corporation, or selling assets to the corporation, which may result in some built-in gains. Otherwise, since the corporation requires all items, such as income, distributions, credits, etc., to be allocated based on share ownership, the items for one shareholder will be given to all shareholders. As I said, the only exceptions I can think of are loans to the company, and transactions between the shareholder and the company.

I hope this helps! Let me know if you have any more questions.

Roger
Customer: replied 11 months ago.

OK.....Excellent...

In order to balance the M-2 AAA-line 5 Distribution in Excess of Basis exact dollar amount equal to Shareholder’s Distribution in Excess of Basis Capital Gain on Schedule D: is to insert on M-2 AAA-line 5-other reductions the offsetting dollar amount. Should I call this prior period adjustment? The difference is only $2,000....i'm going through prior years to see if it could be found...

 

I believe the most important part of the M-2 in my case is to show the ending balance of the AAA to be zero and Line 5 Distribution in Excess of Basis, and, since we know the Profit and the Distribution in Excess of Basis is correct which creates the correct tax liability.

Thanks Again..

Expert:  taxmanrog replied 11 months ago.

If you are only $2,000 off on a 40 shareholder corporation, you are doing well! You are correct, the distribution in excess of basis and the zero ending basis are the important things to get correct. If you need to "plug" the amount somewhere, calling it a prior period adjustment, this is acceptable. If the amount is not material (which I doubt $2k is) then there is no problem doing this.

 

I hope this helps! Let me know if you have any more questions!

 

Thanks!

 

Roger

Customer: replied 11 months ago.

 


Very much Appreciate all your answers to my questions…..EXTREMELY HELPFUL.


Note: I was using 40 shareholders as an example only.


 


I have another question and I will double your fee of $38 for the following question…


 


This is a new question and maybe in the future or now, you would like me to close the session and start a new one????


 


 


Question:



  1. Shareholder purchased a corporate computer so Shareholder could do some work at Shareholders home. Shareholder has two other computers at his home for personal use; therefore this work computer is just for work. Since the corporate computer at Shareholder’s home is new and therefore faster etc….Shareholder sometimes uses the Corporate Computer for personal use. I would say 80 percent for work and 20 personal for personal use.


Questions.



  1. Corporation will only expense 80 percent and 20 percent for Shareholder’s Personal use. There will be M-1 Adjustment for the 20% between book and tax. Since Balance Sheet Schedule L = Book Balance Sheet; the Book to Tax difference will have an effect on shareholder’s basis, since the shareholder received a benefit of using the computer 20% of the time. There are 2 options which come to mind:

  2. (1) Shareholder reduces his personal control worksheet reducing his basis by 20% of the computer cost or (2) Reclassify the 20 percent as a Corporate loan to the Shareholder; charging the market rate of interest each year? Shareholder loans the Corporation money periodically and therefore it would either decrease this loan to the Corporation or start a new loan in which the Shareholder has a liability to the Corp. with interest…


 

Expert:  taxmanrog replied 11 months ago.
No, this is not the treatment.

The computer is a listed asset. It will be capitalized at 100%. Then, the basis for depreciation (or §179 deduction) is limited to 80%. The remaining 20% stays in the fixed assets as nondepreciable basis.

If the shareholder purchased the computer, he could debit the fixed assets, and credit the due to shareholder. The 20% does not come into play, as the asset part stays with the corporation.

I hope this helps! Let me know if you have any more questions.

Roger
Customer: replied 11 months ago.

 


Corporation rents a monthly storage facility to keep Furniture and fixture for future use. A Shareholder uses 20% of storage facility for personal storage last year. The monthly fee is paid by the Corporation.



  1. The Corporation eliminates 20% of the expense for tax purposes using M-1?

  2. The Corporation creates a Shareholder receivable from the Shareholder for 20% of the expense and charges the shareholder interest until the receivable is paid?

Expert:  taxmanrog replied 11 months ago.

No, the corporation would not use an M-1 to eliminate the expense. When the corporation creates the shareholder receivable, the journal entry would be debit receivable, credit the rental expense. This one entry both removes the 20% that is personal use, and creates the receivable from the shareholder.

 

Sometimes simple accounting can resolve complex questions! I hope this answers yours! If you have any more, please let me know! I enjoy answering these !

 

Roger

Customer: replied 11 months ago.


Point Taken....


 



  1. Does a Corporation Accounts Receivable/Note from Shareholder reduce the basis of the Shareholder?

  2. Is there any rule regarding having an accounts receivable or Note from a shareholder in an S-Corporation?

  3. The Corporate accounts receivable or Note from shareholder could be offset against Shareholders Distributions?

  4. Reclassifying the accounts receivable or Note from shareholder to Shareholders distributions could cause Capital Gain if the Shareholders basis goes negative?

  5. Creating an accounts receivable or note from shareholder, and not reclassifying them to shareholders distribution, will defer the Capital Gain tax.

Expert:  taxmanrog replied 11 months ago.

No it does not. The corporation has a claim against the shareholder, so there is no basis reduction, unless the corporation does not intend to ever collect the receivable.

 

A distribution could be used to pay off a shareholder receivable. The entry for that would actually be debit distributions, credit note receivable, but this is just a shortcut for what would be two transactions - first payment of the distribution with cash, then second pay the receivable with the cash.

 

Yes, as this would be viewed as a two-step transaction, the distribution could cause a gain if the distribution is in excess of basis. Yes, in effect you could defer the capital gain if there is a bona fide receivable.

 

If you have any more questions, please let me know!

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and 6 other Tax Specialists are ready to help you
Customer: replied 11 months ago.


I opened up a new question on the main site requesting only YOU....

Expert:  taxmanrog replied 11 months ago.

Thanks! I answered it. I appreciate your requesting me!

 

Roger

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