Now, they are not waiting and want S Corporation shareholders to provide their proof of adequate basis in advance of any request. When comparing an LLC vs. S Corp, you’ll want to be aware of key differences. san jose state university. In the fourth year the business sustains a $200,000 loss. Knowing your shareholder basis is important if: With how volatile the construction industry can be, it is imperative that all shareholders of a construction company know what their basis is. After three years John’s basis is $400,000. S corps can choose an accounting method that's best suited to reporting the income and expenses of a particular company. Adding these new basis reporting requirements to the already established loss limitation rules (i.e. The IRS added a new column where you check a box if a basis computation is required. It would be to the benefit of all S Corporation shareholders to make sure they have an up to date basis schedule in case they meet the new requirements for attaching that schedule to their personal tax return. 1366 - 2 (a) (2), the indebtedness must be bona fide. Originally, the new rules applied to tax year 2019 (taxable years that began on or after January 1, 2019). In order to establish debt basis, a shareholder must provide proof of a bona fide indebtedness that runs directly from the shareholder to the corporation, and that there was an actual economic outlay. 1. S corporations, in general, do not make dividend distributions. The concept of basis is simple, but calculating basis for S corporation stock takes much of many CPA tax practitioners’ time and energy. Most states require that corporations hold regular shareholder meetings and keep minutes of such meetings. There are many different tax and reporting requirements a corporation may be subject to, including the following. If a return is considered deficient in this manner, it will not start the running of the statute of limitations for assessment of tax. Some S Corporation shareholders think this is a new rule but it is only new to the extent that the IRS wants the basis schedule attached to the Schedule E in advance of any request by the IRS. They're not required to use the accrual method of accounting. And you as the secretary take “minutes” or notes. One of the advantages of being structured as an S Corp is that shareholder basis has the potential of increasing annually as long as taxable income exceeds cash distributions paid to shareholders. For example, the fact that a shareholder receives a K-1 reflecting a loss does not mean that the shareholder is entitled to claim that loss automatically; you must have adequate basis to claim the loss. Per the form instructions, if an individual reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from an S Corporation, they must check the new box and attach a copy of their stock basis computation. Reporting Requirements ....12 Extraterritorial Income Exclusion .....12 Specific Instructions .....12 Period Covered .....12 Name and Address .....12 Item B. 1031 exchanges can complicate your annual tax reporting, but it's important to be proactive and accurately report your exchange to ensure its success. How do I do this in ProSeries? Losses are permitted to be deducted in the current tax year if the shareholder has enough basis to cover the amount of the loss.Basis is also used in determining the gain or loss on a shareholder's disposal of stock. If your construction company opened up shop 3 years ago the task isn’t so bad, however if it was incorporated in the 1980’s, you may not have the historical data readily available to perform the necessary calculations. All rights reserved. First, the debt must run directly from the shareholder to the S corporation. Mark J. Corey, CPA, JD. New tax basis reporting requirements The IRS made several revisions to the individual income tax return (Form 1040) during the 2018 tax filing season. The New Basis-Reporting Rule. The basis calculation must be attached to your personal tax return (if required). As many small business taxpayers in the construction industry are organized as S corporations, this is an important concept that can be overlooked and unknowingly lead to unintended consequences. If distributions received are fully covered by shareholders' basis, then they do not have to report the distribution as taxable income. Please see our previous article on the basics of calculating S Corporation basis. Husband is sole member of LLC taxed as an S Corp dies in May 2018. The best and only way to truly know your basis is correct is to go back to the S election date (or date your first acquired stock in the S corporation) and roll forward from the beginning. 1366 - 2 (a) (2), the indebtedness must be bona fide. tax free distributions), however distributions are only tax free to the extent they do not exceed stock basis. [1040] New S-Corp basis reporting requirement on Sch. This has been the law for a long time- shareholders (not the corporation) are required to track the basis in their S Corporation stock and make sure they have sufficient basis to takes losses or distributions tax-free when they report these items on their personal return on Schedule E. So what is “new” in the IRS clarification? Additionally, the 2018 form Schedule E, Part II, has a new check box requiring an individual to affirmatively indicate when the S corporation basis computation is required to be attached. In the published clarification the IRS states they want a basis schedule attached when the owner of an S Corporation reports a loss, receives a distribution, disposes of stock or receives a loan repayment from the S Corporation. The Act amends the Internal Revenue Code by (i) amending Section 1014 to add a new subsection, 1014(f), and (ii) adding Section 6035. Sec. Author: Andrew Schoenemann, CPA  |  aschoenemann@withum.com, We are an independent member of HLB — The Global Advisory and Accounting Network, We use cookies to improve your experience and optimize user-friendliness. In order to report pass-through losses or deductions, shareholders must first verify that they have enough basis in the S corporation. 1140.5, 2200.7 and 4110.5. What is new is two-fold: This is a departure from the traditional rule in that the IRS always required S Corporation owners to be able to provide, upon request, proof of necessary basis in their stock to take losses or prove distributions were not in excess of their basis (and therefore taxable). If, for example, a taxpayer has a $100,000 note with a basis of $50,000 and the S corporation repays $50,000 in principal, the shareholder will have a capital gain of $25,000 on the repayment. The penalty is $195 per partner per month for up to a year (that is up to $2,340 per partner for whom the negative basis is not reported). Although the IRS is not instituting penalties at this time for omitting the basis information from the return, the return may be viewed as deficient because it does not contain sufficient information to allow the IRS to verify the mathematical calculation of the tax liability shown on the return. About the author Debt must meet two requirements to qualify as S corporation basis. 4 situations when stock basis reporting on 1040 is required for s corporation shareholders. The requirement for a shareholder to maintain their basis is not a new requirement, only the disclosure of the calculation. basis reporting and tracking by s corp. shareholders as well as partners and members 7th annual irs -sjsu small business tax institute. It is important that a shareholder know his/her stock basis when: The S corporation allocates a loss and/or deduction item to the shareholder. Defer the tax. Second, under Regs. Additionally, failure to disclose this information when required is a red flag that could put your return under IRS examination. And Treasury Regulation section 1.6001-1(a) requires shareholders to maintain permanent books and records to establish losses and deductions reported on their return (basis computation). They do make tax-free non-dividend distributions unless the distribution exceeds the shareholder's stock basis. Disclosure is required regardless of whether the balance is positive or negative. Beginning in 2018, the IRS has expanded the requirement for individuals to attach S corporation tax basis schedules to their tax return. 1031 Hotline: If you have questions about 1031 exchange tax reporting requirements, or anything regarding 1031, feel free to call me at 612-643-1031. Without knowing their basis, S corporation shareholders are at risk of over or under stating their taxable income in a given year. This was an area for potential abuse by taxpayers and the IRS took action as part of tax reform by instituting this new requirement for basis schedules to be attached when the information is pertinent to the taxpayer’s return. 1) distributions to the shareholder by the corporation In order for the shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis. The IRS website for Form 1065 Frequently Asked Questions (FAQs), “Negative Tax Basis Capital Account Reporting Requirements,” provides guidance on the calculation of a partner’s tax basis capital account in FAQ 2, and, for clarity, the definition of tax basis … Beginning in 2018, the IRS has expanded the requirement for individuals to attach S corporation tax basis schedules to their tax return. Sec. Why is this the case? Specifically, an individual who has a loss, distribution, stock disposition, or loan repayment from an S corporation must attach the stock and/or debt basis calculation to their tax return. Clarified that Rule 3-13 of Regulation S-X applies only to the financial statements included in a Form 8-K and not to the timely filing requirement of the Form itself. The difficultly in reconstructing basis comes down to what records are available. S Corporation Stock and Debt Basis Importance of Stock Basis. Basis measures the amount that the property’s owner is treated as having invested in the property. BASIS REPORTING REQUIRED FOR 2018 Draft Form Schedule E Check out the new note line in Part II: Note: If you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in column (e) on line 28 and attach the required basis …