Question

Basis Calculation LLC with new S-Corp Election?

Forum|Forum|7 years ago
June 3, 2019
1 reply
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Hello, I'm looking for some help on calculating end of 2018 shareholder basis for a business operating in 2017 as a SMLLC and as an SMLLC with an S Corp election effective 2018, plus a few other related questions.

Pre-S Corp Election Contributed Capital (2017): $A

Post-S Corp Election Contributed Capital (2018): $B

Pre-Election losses, flowed through to personal return (2017): ($C) - assume not counted towards basis? Does retained earnings go to zero for 2018 beginning balance on my S Corp 2018 balance sheet? What would the journal entry be for these retained earnings to zero out?

Pre-Election Section 179 Carryover of disallowed deduction, carried forward due to NOL: $D

Post-Election NOL for 2018: ($E). I assume I can take the loss on my 2018 personal return against other income and I do not have to carry forward the loss as my basis remains positive if calculated in the method shown below?

No loans, distributions, or wages up to now.

Proposed basis calculation: $A + $B + ($E)

And in the year with sufficient revenue that I take the Section 179 depreciation expense (should be this year), -$D to my basis calculation.

Can I continue carry over the pre-election Section 179 to a future tax year that has sufficient net income? Any other recommendations on this basis calculation?

Thanks!

TurboTax Business Windows

Rick19744

Employee

It would be in your best interest to consult with a tax professional to grasp how S corps work and getting you started down the right path. Having said that, I will provide some discussion:

When you made the S election, what ever you contributed into that entity is your beginning basis. Property will carry over based on the adjusted basis and cash is just cash. If the S corp assumes liabilities, then this adjusts your basis as well.
From here on out (once beginning basis is determined) you will adjust your basis annually based on the applicable lines of the K-1 issued to you.
Anything that occurred before the S election, will have no impact on your basis.
Your beginning balance sheet will not have any retained earnings. It will simply be debits and credits related to the items discussed in bullet 1 above. The remaining balancing entry will be to shareholder equity.
Any Section 179 carryover is a personal item and will have no impact on the S corporation.
You will be able to take losses on your personal return only to the extent you have basis; either capital or debt basis.
Maintaining an accurate basis schedule is extremely important as it determines allowable losses, tax impact of distributions, etc.
While the attached link to the IRS is based on 2015, it will generally still hold true; the line numbers on the K-1 may have changed somewhat (I did not check this). https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-stock-and-debt-basis
Also make sure that you prepare your 1120S first as the K-1 reporting will impact your personal tax return. We see instances where individuals have already prepared their 1040 and then start asking questions about the 1120S.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

I

info14Author

Thanks Rick. To clarify, beginning S corp basis of "what ever you contributed" represents the LLC's assets and liabilities and my contributed capital as of the day before the S election? Company assets are cash and inventory. My only liabilities are accounts payable and deferred revenue. No debt. Owner's Equity includes contributed capital I put in to the business and negative retained earnings (due to NOL's for 2017 and also 2018). Also how do I determine if I need to pay taxes on the S election based on Section 357 liabilities exceeding basis <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.357-2">https://www.law.cornell.edu/cfr/text/26/1.357-2</a> ? Would that calculation for me be the the LLC's assets+contributed capital-liabilities mentioned above (with all figures presumably determined end of 2017 right before the S election)? And is it the same calculation for beginning basis of the S corp? Not sure what you mean by "Anything that occurred before the S election, will have no impact on your basis."