[jhu0419]

Becker Question –

Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for the year. Alpha distributed $30,000 in cash to Baker during the year.

What amount of the $30,000 cash distribution is taxable to Baker ?

A) 0

B) 5,000

C) 7,000

D) 30,000

The answer is C. But I am confused with it. In my mind, the new basis = old basis + income – distribution – loss, (distribution cannot exceed basis, loss cannot exceed basis), the order to consider is first income, then distribution, then loss. Therefore, the new basis before distribution = 25,000+1,000=26,000, so 26,000 should be return of basis, which is non-taxable. 4,000 is capital gain + 1,000 ordinary income are taxable (total is 5,000 taxable)

Where am I wrong ? Thank you!!!

[SeattleAccountant]

I think you are overthinking it 🙂

Also, where in the world did you get rule that distribution can not exceed basis, especially cash distribution?! It happens all the time. Maybe you are thinking of substituted basis for property in partnership distributions of property and liquidating distributions – then, yes, there is a rule that we can not go past zero basis and to “get out, we need to zero out” for the liquidations, but this is S corp and different rules apply.

General rule: S corp distributions are not taxable b/c pass-thru amounts are taxed at time reported not when funds are distributed. However, if the distribution is in excess of taxpayer basis, that excess is potentially taxable as capital gain.

Let's calculate basis first and see if anything distributed is over it.

Beg basis 25K + additions of 1K – 3K cap loss pass thru (this loss is OK b/c it is not in excess of basis) = 23K ending basis

Amount distributed: 30K

Amount distributed in excess of basis = 30-23 = 7K

Thus, the correct amount is C) 7K taxable.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[jhu0419]

@SeattleAccountant Thank you, I think I need more time to review all I learnt. Good luck on your REG !

[SeattleAccountant]

@jhu,

Thank you, can not wait to take this test and be over with it.

I figured you probably had mixed up S corps with partnerships or misunderstood losses limitations. Just remember that losses do make difference if they are greater than basis. If the loss in the above example was much bigger, let's say loss of 28K and we have only 25+1 = 26K basis – 28K loss there is a problem. We would have to carryforward loss of 2K for indefinite time until basis gets reestablished.

Good luck!

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[MCLKT]

Seattle – you rock! I can't wait to celebrate passing scores 🙂

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[SeattleAccountant]

@MCKLT, jhu,

Thank you guys! You wouldn't guess of how much I want this test to be over with. Just plain tired at being pulled in different directions given REG vast topics.

A few more days left, good luck to all of us!

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[Mike1987]

Goodluck Seattle and MCLKT, I'm sure you guys will do great. The Sims were not as terrible for me just takes a bit to figure out what it was asking (they seemed more like very long versions of difficult mc questions that could be in Becker). I felt the Becker sims alone might have been enough to prepare me.

[Author]

Replies