s-corp basis


R

rscpa

An S-corp with positive basis, unelects S status, after 5
years re-elects S status. What is the basis? Does it go
back to the basis in its final year as an S-corp.
 
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D

David Woods, EA, ChFC, CLU

rscpa said:
An S-corp with positive basis, unelects S status, after 5
years re-elects S status. What is the basis? Does it go
back to the basis in its final year as an S-corp.
Well it doesn't "go back", it is simply frozen during the
final year of the first s election period barring any
further capital contributions during the subsequent c
period.
 
E

Ed Zollars, CPA

rscpa said:
An S-corp with positive basis, unelects S status, after 5
years re-elects S status. What is the basis? Does it go
back to the basis in its final year as an S-corp.
Go back? Why do you think it *changed* when the corporation
terminated its S election? You would use that basis as
starting point for computing basis during the C corporation
period.

Basis is something a shareholder has, not something internal
to the corporation.

For example, you start a corporation, contribute $1`,000 for
stock and elect S status immediately. The corporation shows
$1,000 in income and makes no distributions for the first
year. Basis is $2,000. It terminates the election at the
beginning of year 2.

For years 2-6, it also earns $1,000, makes no distributions
and there are no contributions of capital. In year 7, it
again picks up S status and again earns $1,000 with no
distributions or contributions.

Basis, which began at $1,000 is as follows at the end of each year:

Yr Basis Type
1 $2,000 S
2 $2,000 C
3 $2,000 C
4 $2,000 C
5 $2,000 C
6 $2,000 C
7 $3,000 S
 
G

Gene E. Utterback, EA

Ed Zollars said:
rscpa wrote:
Go back? Why do you think it *changed* when the corporation
terminated its S election? You would use that basis as
starting point for computing basis during the C corporation
period.

Basis is something a shareholder has, not something internal
to the corporation.

For example, you start a corporation, contribute $1`,000 for
stock and elect S status immediately. The corporation shows
$1,000 in income and makes no distributions for the first
year. Basis is $2,000. It terminates the election at the
beginning of year 2.

For years 2-6, it also earns $1,000, makes no distributions
and there are no contributions of capital. In year 7, it
again picks up S status and again earns $1,000 with no
distributions or contributions.

Basis, which began at $1,000 is as follows at the end of each year:

Yr Basis Type
1 $2,000 S
2 $2,000 C
3 $2,000 C
4 $2,000 C
5 $2,000 C
6 $2,000 C
7 $3,000 S
Don't you also need to be mindful of distributions/dividends
paid after going from an S to a C if there were AAA amounts
available to distribute? I know if a C corp elects S status
AND has Accumulated E&P we have to watch for distributions
in excess of AAA which would cut into E&P and which could be
taxable dividends to the recipients. But what about
distributions from AAA after going from S to C? I don't
recall seeing any guidance on how to treat that hoop.

Gene E. Utterback, EA
 
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E

Ed Zollars, CPA

Don't you also need to be mindful of distributions/dividends
paid after going from an S to a C if there were AAA amounts
available to distribute? I know if a C corp elects S status
AND has Accumulated E&P we have to watch for distributions
in excess of AAA which would cut into E&P and which could be
taxable dividends to the recipients. But what about
distributions from AAA after going from S to C? I don't
recall seeing any guidance on how to treat that hoop.
Well, I intentionally "simplified" the example by not making
distributions to concentrate solely on basis. However, IRC
Section 1371(e) provides that you are allowed to distribute
the AAA during the post-termination transition period (as
defined by Section 1377(b)(1)(A)). After that point, the
AAA becomes essentially irrelevant in the C corporation.
Exhaust E&P and then any excess becomes a return of basis
or, if basis is exhausted, a capital gain.

Since "nondividend" distributions from an S corporation
reduce basis and then become capital gains, what that period
really does is give you a short period where distributions
*first* come out of AAA--then we revert to the standard C
corporation rules.
 

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