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11. Chapter. S Corporations. S Corporations. Basis Limitation for Losses. Basis Limitation for Losses. [IRC §1366(d)(1)] Deductions for losses from S corporations are limited to: The shareholder’s basis in the stock plus

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s corporations2

S Corporations

Basis Limitation for Losses

basis limitation for losses
Basis Limitation for Losses
  • [IRC §1366(d)(1)] Deductions for losses from S corporations are limited to:
    • The shareholder’s basis in the stock plus
    • The shareholder’s basis in any indebtedness of the corporation to the shareholder
basis limitation for losses4
Basis Limitation for Losses
  • [IRC §1366(d)(1)(A)] To determine the basis limit, stock basis is adjusted for current year items in IRC §1367(a)(1) and (a)(2)(A) only
basis limitation for losses5
Basis Limitation for Losses
  • [IRC §1367(a)(2)] Basis is reduced by losses but not below zero
  • [IRC §1367(b)(2)(A)] Deductible losses reduce the basis of the stock first (but not below zero) and then reduce the basis of debt
basis limitation for losses6
Basis Limitation for Losses
  • [IRC §1367(b)(2)(B)] Restoration of basis:
    • Basis in debt obligations are restored first before restoring stock basis
  • [Rev. Rul. 64-162] If the corporation pays off the debt to the shareholder/creditor before the basis is restored, he/she must recognize a gain
    • If the debt was evidence by a security, the gain is a capital gain (otherwise, the gain is an ordinary gain)
basis limitation for losses7
Basis Limitation for Losses
  • [IRC §1366(d)(2)] Excess losses carry forward indefinitely and are deductible when the S corporation stock basis is restored
basis limitations
Basis Limitations
  • See Examples 2 & 3
s corporations9

S Corporations

Penalty Taxes or “Sting Taxes”Built-In Gains

built in gains tax
Built-In Gains Tax
  • Enacted to keep C corporations from avoiding paying taxes on liquidating distributions by electing S corporation status just before liquidating the corporation or selling its assets
    • Tax is imposed directly on the S corporation[IRC §1374(a)]
    • Tax applies only to S corporations that were formerly C corporations [IRC §1374(c)(1)]
built in gains tax11
Built-In Gains Tax
  • [IRC §1374(d)(1)] The net unrealized built-in gain equals:
    • The corporation’s aggregate asset FMV at the beginning of its first year as an S corporation less
    • The corporation’s aggregate asset adjusted basis at the beginning of its first year as an S corporation
built in gains tax12
Built-In Gains Tax
  • [IRC §1374(d)(3)] Recognized built-in gain means any gain recognized during the recognition period on the disposition of any asset exceptto the extent that:
    • The asset was acquired after the election of S corporation status, or
    • The gain exceeds the FMV less the asset’s adjusted basis at the time the S election was made
built in gains tax13
Built-In Gains Tax
  • [IRC §1374(d)(3)] Recognized built-inloss means any loss recognized during the recognition period on the disposition of any asset to the extent that:
    • The asset was held at the time S corporation status was elected, and
    • The loss does not exceed the asset’s adjusted basis less the FMV at the time the S election was made
built in gains tax14
Built-In Gains Tax
  • [IRC §1374(d)(7)] The recognition period means the first 10 years after the corporation becomes an S corporation
built in gains tax15
Built-In Gains Tax
  • [IRC §1374(d)(2)] The net recognized built-in gain means the lesser of:
    • The amount that would be taxable income for the year if only recognized built-in gains and recognized built in losses were taken into account, or
    • The corporation’s taxable income for the year under IRC §1375(b)(1)(B)
      • Items of taxable gross income less deductible expenses (without DRD or NOL carryovers)
built in gains tax16
Built-In Gains Tax
  • [IRC §1374(c)(2)] The amount of net recognized built-in gain taken into account for any year shall not exceed:
    • The net unrealized built-in gain less
    • The net recognized built-in gains for prior years
built in gains tax17
Built-In Gains Tax
  • [IRC §1374(b)] A 35% tax is imposed on the net recognized built-in gain for the year
    • The tax imposed is treated as a loss sustained by the corporation [IRC §1366(f)(2)]
    • The character of the loss depends on the character of the recognized built-in gain that gave rise to the tax [IRC §1366(f)(2)]
built in gains tax18
Built-In Gains Tax
  • See Examples 4 & 5