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Can basis be negative in an s-corp?

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rated:
Can a shareholders's basis in an s-corporation be negative?  Or does it stop at zero?

At the end of 2015 basis was $50k (for example)
During 2016, there was a large capital gain from the sale of intangible business assets.
Due to distributions that reduce basis, the computation ends up being negative.

THANKS

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rated:
Yes. Assume $50K basis single owner. Scorp takes a $100K loan out to fund operations. Loses everything. The basis is now negative

rated:
Not sure how your facts could create even a question of negative basis.

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Chill99 said:   Yes. Assume $50K basis single owner. Scorp takes a $100K loan out to fund operations. Loses everything. The basis is now negative
  
Nope. You're allowed to recognize a $50k loss and the basis in your stock is now zero. If you put money into the corp to acquire basis, the suspended loss is then recognized to the extent of your basis.
Unless you terminate the S-corp, then all suspended losses are lost.

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Chill99 said:   Yes. Assume $50K basis single owner. Scorp takes a $100K loan out to fund operations. Loses everything. The basis is now negative
  That's not right.  The Scorp itself might have a negative net value at that point, but your cost basis remains $50k.  The most you can lose is $50k, because that's all you've put in.

Now if you guaranteed that $100k loan, or otherwise add capital to resolve the debt, you basis will be higher and thus able to absorb more of any loss.

rated:
(Great Thread).

My thinking is that you are both right...

Assume that I'm the only shareholder and the only transaction that year was that my SCorp lost $50,000, as a result:
1. My Shareholders Equity is now $50,000 lower AND
2. I have a $50,000 loss on my personal taxes that I can take against other (certain) income.

Thoughts?

rated:
slappycakes said:   (Great Thread).

My thinking is that you are both right...

Assume that I'm the only shareholder and the only transaction that year was that my SCorp lost $50,000, as a result:
1. My Shareholders Equity is now $50,000 lower AND
2. I have a $50,000 loss on my personal taxes that I can take against other (certain) income.

Thoughts?

  In your scenario, I'm assuming you are saying your stock basis at prior year end is 0 and you have no debt basis (i.e. loans you made to the corporation - IIRC personal guarantees don't count). The $50k loss would be suspended until the following year because you have no basis. You cannot take the loss this year because you have 0 basis. If your basis at prior year end is 50k or greater - it's easy - your basis is reduced by 50k and you get to recognize a 50k loss (assuming you meet the other requirements to recognize the loss).

But again, in the OP, there's nothing that indicates there would be a negative basis. Capital gains would increase basis, so a distribution of the capital gain + 50k 2015 EOY basis wouldn't decrease basis below 0. 

rated:
Ok it's helpful to hear some responses!

Sweat equity ($0 cash) basis for some years resulted in a $50k shareholder basis on K-1 Shareholder Basis Computation worksheet.
In another year, I purchased the other owner's shares for $200k (for example). Accountant added this $200k to the Shareholder Basis Computation worksheet = $250k shareholder basis

During 2016, there was a large capital gain from the sale of intangible business assets.

The resulting end of year Shareholder Basis Computation worksheet now shows $100k basis---less than the actual cash of $200k that I put in.

Is this correct?

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marginoferror said:   But again, in the OP, there's nothing that indicates there would be a negative basis. Capital gains would increase basis, so a distribution of the capital gain + 50k 2015 EOY basis wouldn't decrease basis below 0. 
 

  I agree with that statement which makes me think that an error was made in previous years.

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myfrogger said:   Ok it's helpful to hear some responses!

Sweat equity ($0 cash) basis for some years resulted in a $50k shareholder basis on K-1 Shareholder Basis Computation worksheet.
In another year, I purchased the other owner's shares for $200k (for example). Accountant added this $200k to the Shareholder Basis Computation worksheet = $250k shareholder basis

During 2016, there was a large capital gain from the sale of intangible business assets.

The resulting end of year Shareholder Basis Computation worksheet now shows $100k basis---less than the actual cash of $200k that I put in.

Is this correct?

I don't understand the bolded statement.

Also, what is the "Shareholder Basis Computation" worksheet? Is it from the corporation? The corporation generally wouldn't track your outside basis - that's your job.

rated:
Good question...
I receive this attached worksheet along with my K-1 each year from my accountant.  I assume this is tracking my inside basis only.
The $200k is my outside basis and I'm thinking it shouldn't be put on this worksheet.

Regardless...if it's possible to have a negative inside basis, that would reduce my outside basis below the $200k I paid..... correct???

rated:
Any further thoughts? You guys/gals are giving me some great help!

rated:
myfrogger said:   Ok it's helpful to hear some responses!

Sweat equity ($0 cash) basis for some years resulted in a $50k shareholder basis on K-1 Shareholder Basis Computation worksheet.
In another year, I purchased the other owner's shares for $200k (for example). Accountant added this $200k to the Shareholder Basis Computation worksheet = $250k shareholder basis

During 2016, there was a large capital gain from the sale of intangible business assets.

The resulting end of year Shareholder Basis Computation worksheet now shows $100k basis---less than the actual cash of $200k that I put in.

Is this correct?

  
A few things,

Did you personally report the $50k as taxable income when you received the equity?  As that is generally how receipt of stock for services is treated (and in theory the corp should have claimed a $50k income tax deduction for it).

It would be helpful if you added year information to your post, so I'm going to make some assumptions here:  Let's say that you contributed the $50k sweat equity in 2014.  At that point, without anything else, you should have reported $50k of taxable income on your personal return.  Your 2014 basis is the $50k plus any 2014 gain/loss less 2014 distributions.

In 2015, you purchased the shares of another owner for $200k.  At that point, your 2015 year end basis will be the 2014 basis plus the $200k plus any 2015 gain/loss less 2015 distributions.

In 2016, you had a taxable gain (let's say $500k for this example).  At that point, your 2016 year end basis will be the 2015 basis, plus the $500k gain, plus any other income/losses less 2016 distributions.  So, short of you have losses or having received distributions, there is no way that your basis would be only $100k based upon what you have stated (however, there is a lot that you didn't state, which will materially impact what your basis is, which is why I used the example).

In addition, your basis can also be affected by additional capital contributions, share purchases or loans that you made to the corporation.

rated:
Yes I personally reported the $50k as taxable income in 2014
Yes in 2015, exactly as you stated.
In 2016, my accountant claims there are more distributions than gain + income. I just don't understand him on why I can have more distributions than income + gain. Somehow there would have to be money in there to distribute.

There are no losses, capital contributions, share purchases, or loans.

rated:
myfrogger said:   Yes I personally reported the $50k as taxable income in 2014
Yes in 2015, exactly as you stated.
In 2016, my accountant claims there are more distributions than gain + income. I just don't understand him on why I can have more distributions than income + gain. Somehow there would have to be money in there to distribute.

There are no losses, capital contributions, share purchases, or loans.

  
Well, the excess funds that were used as distributions could have come from a few different places then.  The most likely suspects are the initial capital contributions (whatever the other shareholders put in when they purchased their shares, that weren't a result of sweat equity) or loans to the corporation.  

Is the business being closed down?  And when you purchased the shares for $200k, was that the proportionate book value of that shareholder's percentage of the corporation or an amount greater or less than the book value?

rated:
Shareholders put in $100 to start the business. There are no loans to the corporation that haven't been paid back. (No loans from shareholders either).

Yes, the business is being closed down after the sale of assets. The shares I purchased for $200k was far above the book value shown on the balance sheet....but the sale of the assets (goodwill primarily) was also far above the book value on the balance sheet.

Thank you again for your help!

rated:
myfrogger said:   Ok it's helpful to hear some responses!

Sweat equity ($0 cash) basis for some years resulted in a $50k shareholder basis on K-1 Shareholder Basis Computation worksheet.
In another year, I purchased the other owner's shares for $200k (for example). Accountant added this $200k to the Shareholder Basis Computation worksheet = $250k shareholder basis

During 2016, there was a large capital gain from the sale of intangible business assets.

The resulting end of year Shareholder Basis Computation worksheet now shows $100k basis---less than the actual cash of $200k that I put in.

Is this correct?

  In this regard, you didn't put in $200k, you put in $250k.  While there was a shortcut used, you were basically paid $50k "cash" then used that $50k to purchase shares of stock.

rated:
myfrogger said:   Shareholders put in $100 to start the business. There are no loans to the corporation that haven't been paid back. (No loans from shareholders either).

Yes, the business is being closed down after the sale of assets. The shares I purchased for $200k was far above the book value shown on the balance sheet....but the sale of the assets (goodwill primarily) was also far above the book value on the balance sheet.

Thank you again for your help!

 Not bashing you for asking a question here, but out of pure curiosity, if you have an accountant familiar with the S Corp and the details of your situation, why don't you ask the accountant these questions?

rated:
marginoferror said:    Not bashing you for asking a question here, but out of pure curiosity, if you have an accountant familiar with the S Corp and the details of your situation, why don't you ask the accountant these questions?
  
I have...I've spent a few thousands of dollars on my own accountant plus my tax-attorney. They disagree so I tried to figure it out myself....now I'm turning to FW for help. And also I'm not just blindly going to follow any advice given....I'll run it back through my accountant + tax attorney until they both agree.

This is the last sticking point of the disagreements

rated:
Glitch99 said:   
myfrogger said:   Ok it's helpful to hear some responses!

Sweat equity ($0 cash) basis for some years resulted in a $50k shareholder basis on K-1 Shareholder Basis Computation worksheet.
In another year, I purchased the other owner's shares for $200k (for example). Accountant added this $200k to the Shareholder Basis Computation worksheet = $250k shareholder basis

During 2016, there was a large capital gain from the sale of intangible business assets.

The resulting end of year Shareholder Basis Computation worksheet now shows $100k basis---less than the actual cash of $200k that I put in.

Is this correct?

  In this regard, you didn't put in $200k, you put in $250k.  While there was a shortcut used, you were basically paid $50k "cash" then used that $50k to purchase shares of stock.

 
I did not put in $50k....that $50k is a result of income minus distributions....and the business probably needed approx $50k in working capital so that makes sense.  I also paid tax on that $50k since s-corp is a pass through entity.
The $200kwas paid directly to the other shareholder.  (NOT using the $50k cash sitting in the business bank account).  I hope this clarifies.

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