[SkiBum1990]

Capital Loss is NOT a factor in basis:

Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. 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 this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?

B. $4,000

Choice “b” is correct. The order in which stock basis is increased or decreased is important. Because both the taxability of a distribution and the deductibility of a loss are dependent on stock basis, there is an ordering rule for 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.

When determining the taxability of a non-dividend distribution, the shareholder looks solely to his/her stock basis (debt basis is not considered).
In accordance with S-corporation ordering rules for calculation of basis, Baker’s stock basis in Alpha would be calculated as follows:

Initial stock basis $ 25,000
Increase for share of income 1,000
Basis before distribution $ 26,000

Results: $26,000 of the $30,000 distribution would be tax free return of basis; $4,000 would be taxable as capital gain; loss of $3,000 cannot be utilized in current year due to lack of basis.
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NET Capital loss is a factor in basis:

Stahl, an individual, owns 100% of Talon, an S corporation. At the beginning of the year, Stahl’s basis in Talon was $65,000. Talon reported the following items from operations during the current year:

Ordinary loss $ 10,000
Municipal interest income 6,000
Long-term capital gain 4,000
Short-term capital loss 9,000

What was Stahl’s basis in Talon at year-end?

b. $56,000

Choice “b” is correct. Stahl’s basis would be computed as follows:
Beginning basis:
$ 65,000
+ Income 6,000(Tax-free income increases basis)
− Loss(10,000)
− Net capital loss (5,000) ($4,000 gain netted with $9,000 loss)
=$ 56,000

confused.

"The mind can only absorb as much as the seat can take"

B - 79
A - 68, __ (got bumped from Aug 4 release to Aug 23-THANKS AICPA)
R - Oct
F - Nov (HA! 1 month to study working full-time; love NTS rules)

[kcoops44]

So the reason the loss in the first problem can't be taken is because you have to take the distribution before the loss and apply that to basis. Then, if there is basis remaining after a distribution you may take the loss. Since the distribution of $30k is in excess of his $26k basis, the basis is 0 before the loss and therefore it can't be taken. The basis rules should outline the order in which items are added/deducted from basis. First all income is added to basis, then subject out any withdrawal/distributions, then losses. Basis can NEVER be NEGATIVE or less than zero.

Now for the taxable distribution in the first problem, any distribution in excess of basis is taxable. Since $30k was distributed and the basis after considering income is $26k, basis= 0 and cash distributed in excess of basis is $30k-$26k= $4k taxable as a capital gain.

In the second problem, there is more than enough basis to cover the losses in the problem. Since the basis is not zero, the loss can be taken. Losses can only be taken up to the amount of basis remaining in the s-corp. There also wasn't a cash distribution in that problem so it is slightly different than the first problem. Hopefully my thought process helps.

[SkiBum1990]

Thanks a lot!!! much appreciated 😀 definitely is more clear now.

"The mind can only absorb as much as the seat can take"

B - 79
A - 68, __ (got bumped from Aug 4 release to Aug 23-THANKS AICPA)
R - Oct
F - Nov (HA! 1 month to study working full-time; love NTS rules)

[Author]

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