Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax
This answer was rated:

S Corp distributions taken in excess of basis

I have taken distributions in...
I have taken distributions in excess of basis from my s corp and paid capital gains on these distributions. I sold my s corp this year and am trying to understand my basis and taxable capital gain on the sale.
Does my tax basis increase by the distributions I have already paid capital gains tax on?
Show More
Show Less
Ask Your Own Tax Question
Answered in 6 hours by:
9/5/2012
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
Verified

Hello and thank you for your question.

Distributions decrease basis. In the event you have a $0 basis and take a distribution, then you recognize income (capital gain) for the amount of the distribution. Basis remains at $0.

For the technical definition of basis, see IRC 1367 (Internal Revenue Code Section 1367). www.law.cornell.edu/uscode/text/26/1367

In general, increases in basis result from items of income of the S-Corp. Increases in basis also result from shareholder capital contributions and loans to the S-Corp. On the other hand, decreases in basis result from expenses, distributions, and loan repayments to shareholders.

Note, a loan only increases a shareholder's basis in the S-corp if the loan comes from the shareholder. A third party creditor that makes a loan to the S-corp will have no effect on shareholder basis.

Given the above, it should be clear that your basis in the S-corp is a dynamic number. Each year, it is common for shareholders to receive a basis statement from their S-corp along with the schedule K-1, but this is not required and ultimately it is the shareholders' responsibility to track their basis from year to year. Shareholder basis does not appear on the S-corp return or schedule K-1.

A shareholders basis may differ for regular tax purposes and alternative minimum tax purposes. Therefore, you are computing the gain/loss twice should you dispose of the stock: once for regular tax purposes and once for alternative minimum tax purposes.

The gain or loss on the disposal of S-corp stock can result in short term or long term gain depending on how long the stock is held.

Alternatively, the S-corp can sell all of its assets and liabilities without selling the stock. This is called an asset sale as opposed to a stock sale. The seller usually prefers a stock sale while the purchaser prefers an asset sale (primarily because assets can be depreciated resulting in business deductions while stock is not depreciated and no deduction is obtained until the stock is sold or disposed of, though there are many additional factors).

I hope this information is helpful.

Ask Your Own Tax Question
Customer reply replied 5 years ago

Basis is separate of retained earnings right? As our retained earnings is way negative.

I feel like I am paying tax twice on the distributions taken over my basis. Am I? We have paid back all the company debt with the sale proceeds.

Basis and retained earnings are different numbers, correct. Basis in this case is referring to your basis, as defined by the internal revenue code, in your S-corporation shares. Retained earnings is not defined in the internal revenue code and reflects the corporation's retained equity (deficit) in earnings (losses). Retained earnings in the U.S. is generally defined by GAAP (generally accepted accounting principles) as promulgated by the FASB (Financial Accounting Standards Board).

In general, no, the laws prevent you from recognizing gain twice. If you incorrectly calculate your basis in your S-corporation shares then you could inadvertently recognize more gain than you truly should (or loss...). To tell whether or not you specifically are calculating your amounts correctly I would have to review your records, assuming they are adequate, and perform the calculation.

If you have never tracked your basis in your S-corporation, then you may find yourself unable to determine your basis. A true calculation of basis starts with your first purchase of stock in the S-corp and runs through the date you sell it.

Assuming an S-corporation's liabilities would result in a capital contribution, increasing your basis.

Again, I hope this is helpful.

BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
Verified
BK-CPA and 87 other Tax Specialists are ready to help you
Ask your own question now
Ask BK-CPA Your Own Question
BK-CPA
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
933 Satisfied Customers
Experience: Owner of a CPA firm

BK-CPA is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,338 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,980 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
An S Corporation & its 2 shareholders are selling the assets
An S Corporation & its 2 shareholders are selling the assets of the Corporation. The Corporation provides corporate credit card processing services and its primary assets are the contracts with its cu… read more
Carter McBride
Carter McBride
LLM
239 satisfied customers
20% tax deduction for pass through entities is limited for
Hi there. 20% tax deduction for pass through entities is limited for service providers like doctors. My question is: An S-Corporation provide medical billing services like sending claim, collecting mo… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,068 satisfied customers
100% S Corp shareholder distributed a vehicle to himself.
100% S Corp shareholder distributed a vehicle to himself. Original cost 59711, A/D 54073, note 48313. He used the vehicle as a trade in for a personal vehicle. I would like 1120 S and k-1 assistance.… read more
taxmanrog
taxmanrog
Master\u0027s Degree
772 satisfied customers
I have a shareholders distribution based on business sale -
I have a shareholders distribution based on business sale - I don't know where to report on my taxes … read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
25,341 satisfied customers
As per the new tax law, the property tax deductions of 10000
As per the new tax law, the property tax deductions of 10000 is it per property or per tax payer per property?If both wife and husband file together can they claim 20000 towards one property or just 1… read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
37 satisfied customers
Who can deduct 529 contributions. Can grandparents deduct
Who can deduct 529 contributions JA: The Accountant will know how to help. Please tell me more, so we can help you best. Customer: Can grandparents deduct 529 contributions JA: Is there anything else … read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
37 satisfied customers
On form 1041, capital gains have to be taxed at the estate
On form 1041, capital gains have to be taxed at the estate level, correct? No distribution deduction may be taken?… read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
37 satisfied customers
The 2018 tax law will allow homeowners to deduct property
The 2018 tax law will allow homeowners to deduct property taxes and either income or sales taxes with a combined limit on these deductions being limited to no more than $10,000. What does this mean? w… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,980 satisfied customers
What are the turm capital gains tax on properties that are
what are the long turm capital gains tax on properties that are in germany? … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,980 satisfied customers
Has the Charitable deduction been affected by the new tax
Has the Charitable deduction been affected by the new tax law??? … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,980 satisfied customers
This is an income tax question. I am thinking of Deducting
This is an income tax question. I am thinking of Deducting next years giving to church this year with pending changes to tax law. As I recall, higher income levels reduce schedule allowable deductions… read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
37 satisfied customers
I'm working to understand capital gains tax for California
I'm working to understand capital gains tax for California property purchased 4 years ago. It's a primary residence, purchased 4 years ago for $385k with $285k principle outstanding. Expected sale price of $630k … read more
Tax.appeal.168
Tax.appeal.168
Principal
13 satisfied customers
Are you familiar with income tax laws on business and
Are you familiar with income tax laws on business and personal returns? … read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
25,341 satisfied customers
Dose mean can not deduct state income taxes only or dose it
dose mean can not deduct state income taxes only or dose it includes property taxes too … read more
Lane
Lane
JD, MBA, CFP, CRPS
Doctoral Degree
37 satisfied customers
Figure out how much is my tax liability + my capital gains +
Figure out how much is my tax liability + my capital gains + depreciation recapture tax … read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
25,341 satisfied customers
You may recall that tax deductions are only deductible by
You may recall that tax deductions are only deductible by the legislative grace of Congress. After this lesson, you might have realized that Congress was pretty generous with the types of business exp… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,791 satisfied customers
Company A transferred assets and liabilities to a newly
Company A transferred assets and liabilities to a newly formed Company B … read more
Lev
Lev
Retired
Bachelor\u0027s Degree Equivalent
25,341 satisfied customers
If an estate received a Schedule K-1 in 2016 but no income
If an estate received a Schedule K-1 in 2016 but no income until 2017, do I file a estate tax return (Form 1041) for 2016 as the personal representative / administrator of the estate?… read more
keeperumiami
keeperumiami
Sr Financial & Tax Consultant
Bachelor\u0027s Degree
1 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x