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I am 100% shareholder of an S-Corp. Losses for the year,

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I am 100% shareholder of...
I am 100% shareholder of an S-Corp.
Losses for the year, combined with distributions, non-deductible expenses and charity will limit the amounts that flow to my personal tax return and will require amounts of the Business Operating Loss and Charity to be in suspense, ie. carried forward.
I am confused about the treatment of the initial capital in my company, reported on the balance sheed as Capital Stock in the amount of $5,000. In determining the amount of Business Operating losses and Charity on a pro-rata basis, that will flow to my personal taxes, does the Shareholder Basis amount limit I use include the Initial Capital Stock amount of $5,000, or should I exclude the $5,000 Capital Stock amount.
In otherwords, if I use the stockholder basis, including taking the value of Capital Stock to zero, the combination of Business Operating Loss and Charity will be $8,000 to my personal taxes. If I limit the pass through to the amount in excess of the Initial Capital Stock, the amount that flows to my personal taxes is $5,000 less, or $3,000.
Which scenario is the correct treatment?
For future tax planning, there may be an advantage for me to increase the suspense amounts of Business Operating Loss and Charity to next year. Do I have discretion to do this, ie. to the extent of the $5,000 Initial Capital Stock amount?
In either case, how do I report to the IRS on my personal taxes that I am utilizing an amount less than the amounts reported on my S-Corp K-1? Do I add a statement that shows the K-1 amount, the amount used in the tax return and the amount in suspense?
Thank you for your evaluation and response.
Submitted: 1 year ago.Category: Tax
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9/12/2016
Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

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Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago

1. The $5,000. initial capital contribution is included in the computation of your tax basis of the S-Corp.

2. You are free to include a reconciling statement with your tax return showing the computation that you made to determine the amount of the S-Corp loss that you are claiming.

If you use a computer program to prepare your tax return, and you enter your basis information in the program, some programs will make the necessary computations and show the carryforward amounts on a Sub-schedule withing either the tax return to be filed or in you copy of the return to be retained for future years.

Using a portion of your tax basis in the computations in order to increase your carryforward losses is not permitted.

Note:

Remember that if you receive cash distributions in excess of your adjusted tax basis in the S-Corp, that will generate a taxable capital gain which must be reported on your income tax return.

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Customer reply replied 1 year ago
Thank you for your response. To ensure I understand the response completely, looks like there is a typo, instead of "withing" did you mean "with"? Otherwise, what does withing mean?Regarding your cautionary note about cash distributions in excess of adjusted basis, the following examples summarizes the approach I am taking, which takes the stock basis down to zero; and carries amounts of business loss and charity forward in Suspense. It is my understanding that the distribution amount of $11,000 in the example does not translate into a capital gain. Do you agree?ASSUMPTIONS:
1 Beginning Stock Basis - Comprised of: $27,000.00
1) Retained Earnings $22,000.00
2) Initial Capital Stock $5,000.00
2 Distribuions to SH $11,000.00
3 Ordinary Business Loss $15,000.00
4 Charity $3,600.00
5 Non-Deductible Expenditures $1,000.00
CALCULATIONS FOR SHAREHOLDER TAX REPORTING
Beginning Stock Basis $27,000.00
Less Distributions to Shareholder $11,000.00
$16,000.00
Less Non Ded Expenses $1,000.00
Basis After N-Ded Expense $10,000.00
Less Business Loss $8,000.00
Less Cash Contributions $4,000.00
Total K-1 Amounts to Shareholder: $12,000.00
Amount in Excess of Basis $2,000.00
SHAREHOLDER TAX REPORTABLE BUSINESS LOSS & CASH CONTRIBUTIONS:
Business Loss =( 8000/12000) x 10000 $6,666.67
Cash Contributions = (4000/12000) x 10000 $3,333.33
$10,000.00
YR-END Shareholder Stock Basis 0
Suspense Items - Carried Forward:
Business Operating Loss $1,333.33
Cash Contributions $666.67
$2,000.00
(Attached Word doc lists these numbers in more readable format, if needed)Thanks for the clarification
Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago

Yes Withinq should be Within as you determined.

Re-check your math..........I'm not following?

You show 27,000. - 11,0000 = 16,000. then you subtract 1,000 & get $10,000? How does that work?

Then you show loss of (8,000) & you lose me

A more important question.........how much is your gross salary included in you $8,000. loss?

If you made cash contributions of $4,000., that belongs at the top of schedule, ie. 27,000 + 4,000. = $31,000.

31,000. less 1,000 Non-Ded expe = 30,000. - Loss of $8,000. Do you mean Charity? In one place you show that as $3,600?

This is going beyond the scope of your original question, & really belongs in a separate question.

Steve G.

PS I'll be back in about an hour.

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Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago

Well, I see you are still "offline", I'll return tomorrow morning around 11AM - 11:30AM as I have an early appointment out of my office. I'll check in then to see if you have responded.

Steve G.

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Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago

By the way, in terms of the proper "ordering" of the annual S-Corp transactions, here is a link to an article from the AICPA's Tax Advisor that you may find helpful in understanding how you determine the tax accounting treatment of the various S-Corp transactions in any given tax year:

http://www.thetaxadviser.com/issues/2014/jan/nitti-jan2014.html

Pay particular attention to examples #5 & #6 at the end of the article under the heading:

Taxability of Distributions From S Corps. With No Accumulated E&P. (IRC Section 1368)

If you follow those examples in determining the proper accounting and shareholder tax basis adjustments of your transactions, you should be able to come up with the correct impact on both your S-Corp's accounting and the affect on your basis on your investment in the S-Corp for the current transactions in your question.

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Tax Professional: Stephen G., Sr Income Tax Expert replied 1 year ago

Just checking in......................

I'd like to close out this question before the end of the month, if possible.

I would appreciate it if you would take a moment to let me know if I can assist you further and if you would provide a rating for my responses as indicated above.

Thanks again,

Steve G.

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