[kanba]

I think this two questions are same but the calculations are different. Could anyone tell me which one is correct? I advocate Becker’s calculation personally. What’s your guys opinion?

Becker:

1. A, an individual owned 100% of C, a S corp. At the begining of year, A’s basis is 25,000, ordinary income is 1,000 and LT capital loss is 3,000. C distribute 30,000 cash to A, what amount of the 30,000 cash distribution is taxable to A?

The answer is 7,000 30000-(25000+1000-3000)

Gleim:

2. A owned 100% C corp, a S Corp. At the begining of year, A’s basis is 20,000. C has ordinary income 5,000 and capital loss of 10,000. A receive cash distribution of 35,000. What is A’s gain from the ditribution?

The answer is 10,000 35000-(20000+5000), not deduct the 20,000 capital loss.

[Anonymous]

Yeah, I'm not sure why Gleim is not including that $10,000 Capital Loss. Yes, it's Separately stated and is not included on the 1120-S, but it still should be deducted from the shareholder's basis so long as it doesn't reduce it below 0. What concept am I missing? Hmm. I hope some tax expert can help us.

[Anonymous]

Just checked my Gleim software for the question and looked at the solution. Never encountered this question before, but here's the quirk…. You're supposed to deduct the Distribution FIRST. Then, the capital loss. Since there's no more basis left after you deduct the Distribution, you can't deduct the Capital Loss. Now, that is Gleim's explanation and I can't figure out why that is so. But one thing I do know is that it conflicts with Becker's question. They deduct the Capital Loss first. Ok, I'm confused…..

I'm leaning more towards Becker's question though as that one makes more sense. Gleim's explanation is a bit iffy.

[Anonymous]

bump!

Anyone? This looks like a pretty important thing to know. I'd like to hear input from the tax experts here.

[kanba]

Yeah. I found the same question on Wiley which has the same answer with Gleim, not deduct the loss before distribution. I'm so confused!! Any tax experts here can help.

[Anonymous]

According to the IRS on the calculation of stock basis at the following URL.

https://www.irs.gov/businesses/small/article/0,,id=203101,00.html

The order in which stock basis is increased or decreased is important. Since both the taxability of a distribution and the deductibility of a loss are dependant on stock basis, there is an ordering rule in computing stock basis. Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order:

Increased for income items and excess depletion;

Decreased for distributions;

Decreased for non-deductible, non-capital expenses and depletion; and

Decreased for items of loss and deduction.

[Anonymous]

So, the Becker answer is wrong then?

[thechamp26]

@CPAMan – it is included on Form 1120-S….

[Anonymous]

@thechamp26- That can't be. Capital gains and losses are separately stated. When an item is separately stated, it doesn't get included in Net Business Income on the 1120S. If you meant on the Schedule K portion of the 1120S, then yes, that's where it gets included. But not on Net Business Income.

[thechamp26]

I'm aware… you didn't mention “net business income” before, you just said “not included on the 1120-S”.. just pointing out the fact that separately stated items are on the 1120S.

Anyway… distributions should be deducted from the basis before capital losses are considered. So, in the Becker problem, I would expect to see a $4,000 capital gain to be picked up by the individual and a $3,000 capital loss carryforward. The scary thing about the Becker question is that it was released by the AICPA haha

[Anonymous]

Ok, sorry. My bad.

And thanks for clarifying the OP's question.

[Author]

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