Stock Basis Calculation for Pass-Through Entities: Challenges for Tax Professionals Tackling Complex Issues for S Corporations, LLCs and Partnerships TUESDAY, AUGUST 6, 2013, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Respond to verification codes presented throughout the seminar . If you have not printed out the “Official Record of Attendance”, please print it now . (see “Handouts” tab in “Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form . • Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. • To earn full credit, you must remain on the line for the entire program. For this program, attendees must listen to the audio over the telephone. WHOM TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 (“star” zero)
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Stock Basis Calculation for Pass- Through Entities: Challenges for Tax Professionals Seminar Aug. 6, 2013 Frank Gariepy, Eide Bailly Shauna Shafer, Eide Bailly fgariepy@eidebailly.com sshafer@eidebailly.com
Today’s Program S Corporation Basis Calculations Slide 7 – Slide 35 [Frank Gariepy] Partnership Basis Calculations Slide 36 – Slide 50 [Shauna Shafer] Partnership And LLC At-Risk Basis Slide 51 – Slide 75 [Frank Gariepy]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Frank Gariepy, Eide Bailly S CORPORATION BASIS CALCULATIONS
IRS Circular 230 Notice Any tax advice expressed in this communication is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer by any governmental taxing authority or agency. In addition, if any such tax advice is made available to any person or party other than the party to whom the advice was originally directed, then such advice, under IRS Circular 230, is to be considered as being delivered to support the promotion or marketing (by a person other than Eide Bailly LLP) of the transaction or matter discussed or referenced. Thus, each taxpayer should seek specific tax advice based on the taxpayer’s particular circumstances from an independent tax advisor. www.eidebailly.com www.eidebailly.com 8
Background • S corporation basis is “simple.” • Increases • Amounts earned • Amounts contributed • Decreases • Amounts deducted • Amounts distributed • Cannot go negative www.eidebailly.com www.eidebailly.com 9
From The Beginning… • Initial stock basis • Cash paid for shares • Net value of property contributed to the corporation (FMV or NTV, depending on transaction) • Taxable value of shares received for services provided • Carried over from shares received as gift • Stepped-up for shares inherited • Any combination of the above www.eidebailly.com www.eidebailly.com 10
Increases To Stock Basis • Capital contributions (property or cash) • Ordinary income • Investment income • Gains • Excess of deductions for depletion www.eidebailly.com www.eidebailly.com 11
Decreases To Stock Basis • Distributions (property or cash) • Business deductions • Non-deductible expenses • Contributions • 179 deduction • Losses www.eidebailly.com www.eidebailly.com 12
Who Cares? • Why and when basis does matter • The company had losses. • The company made distributions. • There was an ownership change in the company. • Basis is a piggybank. • Excess distributions are taxable. www.eidebailly.com www.eidebailly.com 13
Order Of Basis Adjustments: IRC Sect. 1367(a) • Order is very important • First : Stock basis is increased for income items • Second : It is decreased for distributions • Third : It is decreased for nondeductible, noncapital expenses • Fourth : It is decreased for items of loss and deduction • Note: I f basis is positive before distributions but would be zeroed out by deduction items, the excess loss is suspended rather than the excess distributions made taxable. • Election to reduce basis by loss or deduction items before non-deductible expenses [Reg. 1.1367-1(g)] www.eidebailly.com www.eidebailly.com 14
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Example: [Reg. 1.1367-1(g)] • Sophia owns all of the shares of Princess Inc., an S corporation that incorporated and elected S status on Jan. 1, 2012.The corporation uses a Sept. 30 year- end. Sophia’s stock basis on Jan. 1 is $500,000. • The corporation passes through a non-separately stated loss from business activities of $550,000 and $10,000 of non-deductible meals and entertainment. www.eidebailly.com www.eidebailly.com 16
Example 1: [Reg. 1.1367-1(g)] • Under the ordering rules, the $10,000 non-deductible amount reduces basis before it is reduced by items of loss and deduction. Beginning basis $500,000 Less: Non-deductible M&E ($10,000) Basis before loss $490,000 Less: Loss (limited) ($490,000) Ending basis $0 Loss carried forward ($60,000) Loss utilized on 1040 ($490,000) www.eidebailly.com www.eidebailly.com 17
Example 2: [Reg. 1.1367-1(g)] • If an election is made to reverse the ordering rules, the $10,000 non-deductible amount reduces basis AFTER it is reduced by items of loss and deduction. Beginning basis $500,000 Less: Loss (limited) ($500,000) Basis before n/d items $0 Carryforward non-deductible M&E ($10,000) Loss carried forward ($50,000) Loss utilized on 1040 ($500,000) www.eidebailly.com www.eidebailly.com 18
[Reg. 1.1367-1(g)] • The election to reduce basis by loss or deduction items before non- deductible expenses results in a higher deductible loss. • The non-deductible item, however, carries over to future years and will reduce basis when there is sufficient basis to absorb it. • If the election is not made, the non-deductible items do not carry over, even if basis is reduced to zero in the current year. www.eidebailly.com www.eidebailly.com 19
When To Calculate Basis? • Normally calculated at the end of the corporation’s taxable year [Reg. 1.1367-1(d)] • Exceptions: • Disposal of entire shareholder interest • Disposal of substantial interest www.eidebailly.com www.eidebailly.com 20
Per-Share, Per-Day • Pass-through items are generally allocated per-share, per-day [IRC Sect. 1377(a)(1)]. • Each item is divided by the number of days in the tax year, then that amount is allocated equally among the shareholders who held shares on each day – [IRC Sect. 1377(a)(1)]. • Simplified method: The percentage of stock owned is multiplied by the percentage of the year that it is owned – [1120S instructions]. www.eidebailly.com www.eidebailly.com 21
Cut-Off Method • Shareholder’s entire interest is disposed. • Requires “specific accounting election” under [Reg. 1.1377 -1(b)(1)] • Pass-through items are allocated through cut-off date and then again from cut-off date until the end of the year. • Basis is adjusted at cut-off date. • Distributions adjust basis. www.eidebailly.com www.eidebailly.com 22
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