S-corp Basis

[Max W]

I received my client S-corp basis worksheets from my client who has a 45% share in an S-corp that was formed last year.

Prior to 2020, it had been an LLC Partnership.

The worksheet started with "Beginning Year Stock Basis ($55,000)"  This must have been the carry over basis from the LLC.

Can this be done, or shouldn't this have been reported as a capital gain upon closing the LLC?

[Lee B]

Assuming that the partners just did an S Corp election, then the partner's capital was exchanged for stock with no tax implications.

Of course your client's outside basis and inside basis may or may not be the same?

[Max W]

4 hours ago, cbslee said:

Assuming that the partners just did an S Corp election, then the partner's capital was exchanged for stock with no tax implications.

Of course your client's outside basis and inside basis may or may not be the same?

I guess that it explains it.  I was concerned seeing the negative $55K.  Drake software won't take a negative beginning balance, so I will have to attach the client's worksheet. A bit more of a hassle using Drake.

[Abby Normal]

Basis can NEVER be negative. Whoever prepared that K1 basis worksheet did not know what they were doing.

Partners have basis worksheets too. I would ask for the final K1 with basis worksheet for the 1065, but I probably wouldn't trust it after the mess they made of the S corp basis.

[Lee B]

I didn't realize your basis was negative.  Let's assume that the -55,000 is arithmetically accurate.

If so, that means there was enough debt on the PTS books to allow withdrawals of capital excess of basis.

Either way, the prior basis numbers and probably the previous 1065 are not reliable.

[Max W]

Going back and looking at everything I found that the LLC made an election to file as an S-corp in 2020.

I looked at the prior two years and found negative basis there, as well.

The client started as an employee and then she was made a partner with a 10% share of profits and the following year 45%.

So, it looks like she is a member/partner that shares in the profits (none so far) and has no investment in it.  So, I would think that she just has a zero basis.

[Abby Normal]

And she likely has losses suspended due to lack of basis. Or incorrect returns where she deducted those losses.

[Max W]

1 hour ago, Abby Normal said:

And she likely has losses suspended due to lack of basis. Or incorrect returns where she deducted those losses.

It was incorrect returns.  The K-1's, both as LLC and last year taxed as S-corp, all had losses assigned to her on the k-1's Box 1.

Shouldn't the company been evaluated and her equity assigned in dollars?   Then from what I understand that equity is taxable.

The main problem in trying to get this corrected is that the person doing the books is a 10% owner.