S-Corp Basis


J

Justin

I have two hypothetical question on calculating basis for an
S-Corp and distributing profit.

Background:
I have an S-Corp in which I am the sole shareholder. I did
not put any money into this corporation to start it up
(except the $52 payable to state commerce commission to
register). There is a section in the Articles that 100,000
shares would be issued to me.

1. How do I now calculate my basis? Is it based on the
100,000 shares I issued (but no money was put into the
company)?

2. Hypothetically, the corporation will make $100,000 the
first year in business. There will be $60,000 in expenses
($50k of which is W2 salary to me). This means that there
are now $40,000 in profits. My belief is that this $40,000
just flows through to my personal return and gets added to
my AGI (with no self-employment tax correct?). But because
of my basis, or lack thereof, is this the case? Do I have
to carry it over to the next year?

Hopefully this makes sense

Justin
 
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G

Gene Utterback

Justin said:
I have two hypothetical question on calculating basis for an
S-Corp and distributing profit.

Background:
I have an S-Corp in which I am the sole shareholder. I did
not put any money into this corporation to start it up
(except the $52 payable to state commerce commission to
register). There is a section in the Articles that 100,000
shares would be issued to me.

1. How do I now calculate my basis? Is it based on the
100,000 shares I issued (but no money was put into the
company)?

2. Hypothetically, the corporation will make $100,000 the
first year in business. There will be $60,000 in expenses
($50k of which is W2 salary to me). This means that there
are now $40,000 in profits. My belief is that this $40,000
just flows through to my personal return and gets added to
my AGI (with no self-employment tax correct?). But because
of my basis, or lack thereof, is this the case? Do I have
to carry it over to the next year?

Hopefully this makes sense
You need to work with a professional - your question is
rather basic and if you don't understand basic basis
calculations you should not attempt an 1120S on your own.k
You may also have some other issues - for instance, why on
earth would you issue 100,000 shares of stock to yourself if
you are the only stockholder? I suspect that you have some
serious misunderstandings about corporate issues.

That being said - your basis is increased by all of the
positives that occur in the corporation and is decreased by
all the negatives. When you set the company up and paid the
$52 to get registered, that $52 increased your basis. When
the company has $40K in profits, those profits will increase
your basis, when you distribute $40K to yourself that
distribution will decrease your basis. However, there are
other items that will also decrease your basis like
nondeductible items for meals and entertainment and noncash
items like depreciation and accellerated depreciation. And
there are very specific ordering rules you must follow - you
have to start with a specific number and then add and
subtract in very specific sequence to calculate basis.

Please go see a tax pro and get some hands on help.

Gene E. Utterback, EA
 

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