Stock Basis In An S-Corporation?

Forum|Forum|4 years ago
March 29, 2022
2 replies
0 views

Is it accurate to use Form 1120-S, Schedule M-2, line 8 of the Accumulated Adjustments Account as the starting stock basis at the beginning of the tax year? Or does the stock basis have to be calculated another way? Thanks!

TurboTax Business Windows

Best answer by JulieS

Thank you! That IRS guide is very helpful. However, I'm confused about one item. The guide clearly states that "separately stated income items" from boxes 2-10 will increase a shareholder's stock basis. My first K-1 from my S-Corp lists "interest income" on line 4. According to the IRS document I would think I should add that amount to my stock basis. But the K-1 also lists the only items that affect shareholder basis as my lines 16c and 16d. The interest is listed at the bottom as "other information" line 17a. It seems to me that the IRS instructions regarding shareholder basis for lines 2-10 contradict what TurboTax actually prints for line 17a.

Any advice? Do you know if I should add interest to stock basis or not?

To confuse me even more, box 1 "ordinary business income" passes through to my personal taxes, but it is included in the stock basis. Box 4 "interest income" also passes through to my personal taxes. I pay full taxes on both box 1 and box 4, but why would box 4 be treated differently than box 1 for basis? Please help.

Yes, you add interest income to your stock basis.

When you refer to box 17A, I assume you mean Box 17A of Schedule K. Box 17A includes all investment income, not just interest and it is used to calculate your investment interest limits on Form 4852. It is not a contradiction, just a different use.

As for the pass through income, that is the foundation of shareholder's stock basis. The stock basis keeps track of income on which taxes have already been paid. The main use of the basis is to determine if distributions are taxable to the shareholder or are a return of principal.

Anonymous_

Employee

@XrayDoc88 wrote:

Is it accurate to use Form 1120-S, Schedule M-2, line 8 of the Accumulated Adjustments Account as the starting stock basis at the beginning of the tax year?

I do not think so.

See https://www.law.cornell.edu/cfr/text/26/1.1368-2

@Rick19744

XrayDoc88Author

I've been filing 1120-S tax returns since 2009. You would think that somewhere in those filings it would have kept track of the stock basis.

Assuming that all debt/bills have been paid by the S-Corp, would the business checking account balance be the same as the stock basis of the corporation? All income and expenses have been added and subtracted to that single account since I started the S-Corp.

Anonymous_

Employee

It depends but, regardless, you have to start with your initial capital contribution to the corporation.

Note the IRS guide:

Untitled.png

Rick19744

Employee

The AAA would not be a good starting point for a number of reasons, which may or may not be applicable:

AAA does not include capital contributions
AAA may not always include all distributions, since it cannot go below zero as a result of distributions
Tax-exempt income does not flow through AAA

*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.