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I have an LLC taxed as an SCorp. At the end of the year 2…

I have an LLC taxed...
I have an LLC taxed as an SCorp. At the end of the year 2 shareholder A has the following basis:
Stock basis -0-
Debt basis 22,615 (Principal amount of debt $91,205)During Year 3 Shareholder A pays himself back $4,500 of the loan bringing the loan balance to $86,705.If the remaining loan balance of $86,705 is transferred to paid-in capital in Year 3 what are the tax consequences to Shareholder A?Because it is not being paid back but is being transferred to equity, does it have to be reported on line 16 code E "repayment of loans from shareholder" on the K-1 and he pick up the recognized gain of $65,205?
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Answered in 1 hour by:
3/13/2018
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,092
Experience: 35 years tax experience, including four years at a Big 4 firm.
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This can be done this way, which will be tax free. It is the same as contributing the cash, then paying off the debt. Which is also tax free, since you will have basis all through the transaction.

Of course, the ending shareholder basis will be $18,115. But there is no tax due on the recapitalization.

Thanks for asking at Just Answer. P{ositive feedback, five stars being best, ***** ***** appreciated. A bonus is welcomed if warranted. I'm PDtax.

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Customer reply replied 4 months ago
Do I show the the $86,705 on line 16 code E "repayment of loans from shareholder" on the K-1?Even though he has a reduced loan basis of $22,615 (because he's taken losses of $68,590), transferring the loan balance of $86,705 to paid-in capital does not trigger gain recognition?And how do I show this change on the Year 3 basis schedule I'm sending to his personal CPA? Please see the Year 2 basis schedule attached..

The s corp does not report loan repayment in this instance on the k-1.

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Customer reply replied 4 months ago
I asked this in the previous question but didn't get a response:
And how do I show this change on the Year 3 basis schedule I'm sending to his personal CPA? Please see the Year 2 basis schedule attached.I'm having trouble, in my tax program (Lacerte), getting the loan principal transferred to PIC to not appear on the basis schedule without showing the distributions on the K-1.

I don't use Lacerte, but I would try to add the assumed cash contribution to basis, then repaying the loan. That should do what you want, and not generate a taxable repayment below at risk.

Try this way, and see if you get better results.

Thanks again for asking at just answer. Positive feedback is appreciated. I'm PDtax.

PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,092
Experience: 35 years tax experience, including four years at a Big 4 firm.
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