S Corp Basis Explanation | Distributions in EXCESS of Basis
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- Опубликовано: 22 мар 2023
- In this video I discuss S Corporation Basis and how distributions in excess of basis cause you to pay capital gains taxes. I also discuss how to avoid taking distributions in excess of basis.
IRS explanation of S Corp Stock and Debt Basis: www.irs.gov/businesses/small-...
Form 7203: www.irs.gov/pub/irs-pdf/f7203...
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#basis #capitalgains #taxes #scorp
Your videos are perfect for new-to-the-game small business owners. Understandable, step-by-step, practical. Thank you.
Hi Navi, I'm a Tax Preparer and this video is truly helpful. Thanks for sharing.
I enjoyed this video. One thing I would love to see that would help long time business owners is how to re-create basis from their history of K-1s. Especially for things like box 16 code C non-deductible items and such. Maybe a tutorial showing exactly which boxes on K-1 are additions to that original capital contribution and which boxes are subtractions so that one could re-create an correct history of basis given that the IRS is now asking that it be tracked correctly.
A million thank yous. You were able to make this capital gains make sense in 15 minutes that multiple conversations with my accountant could not achieve. I changed my business structure from sole proprietor to S Corp January 2020 and just as you said took an EIDL loan without the understanding of the impact it would have on my taxes. Now, three years later I am understanding how to get out of the capital gains hole. Again, thank you so much.
Did you know that ordinary income counts as basis depending on how many percent of the s corp the shareholder holds.
Thank you for this video! I'm learning S Corps for a few clients. Your excel format streamlined and easily understood.
Thank you for your video. It was exceptionally helpful in explaining some things I had been wondering for a while.
This video was great Navi. The step by steps are clear as a bell. Thanks
This is a fantastic video. It's clear and easy to understand your explanations. Thank you for providing this information.
Great way to lay things out bare in Excel and explain it. Fantastic
Thank you for the video! Much appreciated
Thank you very much for going through the details! :)
Thank you for a detailed explanation.
Thank you. This was a good way to simply explain how an owner takes out more than their basis. The only thing missing would be an explanation of how to change the excess distributions to be a loan to shareholder to avoid paying cap gains on it.
What if I have excess distributions and filing taxes late. Can I still formulate a loan from shareholder to business?
Love it you ROCK🤲🏾
Hi Navi. Great content and simple math for explanation and walk-through. Is 'Distribution' the same as the Owner's Draw (the money you take out of the business account to your personal account)? And is 'Basis' the same terminology for the Accumulated Adjusted Account (AAA)? My CPA tells me to watch out for how much I take out (Owner's Draw) or I will have to pay the Capital Gain taxes on my AAA. Your video seems to nail my question and how to calculate the AAA. Thank you!!
Great video thank you!
Hi Navi, since IRS is asking for these worksheets, can we amend S-Corp's 2021 and 2022 returns simultaneously. And thus, will the shareholders need to amend their personal ones too?
Also how does one track debt basis, interest accumulated, etc if it is paid off in chunks and the debt is open loan?
Thank you!
thanks a lot for your video
Amazing thanks for sharing
Navi, could you explain the steps of going from 2MLLC (Form 1065) to an S Corp the next year? How is basis transferred to the 1120S?
Thanks for making this video. Can you make a follow up video on how to track basis in Quickbooks and how to file form 7203? Also, any strategies to optimize for taking maximum amount of distributions while maintaining positive basis? :)
I’m not sure you can 100% track basis within Quickbooks. Basis is not a financial accounting concept, it’s a tax concept. That said, if you avoid large credit card debt (aka pay down your credit card balances) and taking out business loans where you receive cash, the equity portion of the balance sheet will be similar to your basis. I know that probably isn’t crystal clear but hope it helps.
In the video I mention how to avoid this situation so those would be the strategies to avoid distributions in excess of basis.
@@NaviMarajCPAWhat do you use to track basis if not in QBO?
@SandraLongoria I read somewhere that it is the shareholders job to keep an accurate accounting of basis.
I took out many 3rd party business loans for my 100 percent shareholder. I took out the cash. Is all that cash I took out excess distribution.
Nice content! How should the impact of home office depreciation on S corp basis be recorded? How should a mortgaged business vehicle be recorded?
Hi Navi, thanks for the video. It is very helpful.
Do you have a plan to do a debt basis video?
how does the irs know what your distributions are? if you're only taxed on net profits and distributions dont get taxed, how do they track this? (i'm thinking of distributions as any zelle payment or check that is over and above the payroll wages you process for yourself as a s corp owner on w2. is that what you're referring to or is distributions referring to something more detailed? thanks
Once a Capital gain is recognize. Do we need to adjust the AAA acccount to bring it back to Cero? or does it stay negative?
Hi Navi, what if the business loans are 3rd party loans i receive the cash and distributed the cash to myself. Is this all excess distribution that will be charged capital gains
I am working with a business (gym) that has been a profitable single member llc in 2021 thru 2023. They are converting to scorp in 2024. Can income from those years be used to calculate the starting basis? or basically do they add up totals in bank accounts and value of current assets (gym equipment) to determine starting basis? thanks
Thanks Navi. Another great video. Question somewhat related to this video. When the S Corp has been having losses and on a given year it has a profit, how much in wages/distribution can the shareholders take considering RE is just coming out of the red. Thanks
Thank you! There is a nuanced answer to your question, so can’t answer here. If you haven’t already, maybe watching this video may help: How Much To Pay Yourself | Reasonable Compensation Myths
ruclips.net/video/8pDD-DzjF4Q/видео.html
Good Stuff, Navi!!. My question is if we follow your teaching on reasonable compensation (salary) and distribution, and pay paid off the credit cards and loans, we would be fine? Is that correct?
Posting the link to the video on reasonable compensation and distribution might help here?
Yes, you would likely be fine. Where you can get into trouble is if you took out a loan and received cash (as opposed to taking out a loan to finance equipment, etc.) and then you took that cash out via a distribution. That typically will lead to a basis issue.
Hello Navi, can you recommend a tax planning software for an a CPA. I have a small firm and I would like to offer tax planning services to my clients. The budget is limited so I would appreciate your suggestion
This was great. If a shareholder who took out a distribution that was more than their basis, can they book that draw as a 'loan' to the company and pay it back the next year or later?
Thanks for the video. I don't see how a loan would help resolve the issue as it will be recorded as a liability and not increase basis.
Great info! My question is if my salary is a part of the distribution equation. Is this all on the same line or is my salary a business expense then distribution on a separate line.
Thanks Emil. Your salary would be considered an expense located on the P&L. The distributions are a balance sheet account. I hope this answers your question.
To put this in context of my industry, trucking. If I have a loan on a truck and let’s say I still owe $150k and my company nets $120k does that mean I can’t take a distribution at all?
I have to take a personal loan for my business since I couldn’t take out a business loan. Should I file as shareholders loan to business?
Do the distributions get taxed on the personal level?
Isn’t it a great idea to invest more capital from the beginning and not use credit cards? Liabilities are the main issue I assume? And over/under payments.
What is the proper amount of interest to charge the shareholder for taking out a loan from the S Corp?
Can your yearly distributions be higher than your salary? Hypothetical- Reasonable compensation w/ Salary of 100k, but if it is a good year and the overall net income exceeded 230k. can the distributions be over a matching 100k? (Also implying that the distributions will not exceed the basis).
Absolutely. As long as your reasonable compensation is “reasonable” the sky is the limit on distributions.
So lets say I had the same 35k in credit card debt, but I paid it all off to zero.. would I then be able to give myself 75k in distributions without the extra penalty?
If you paid the credit card off, then you would have had $35k less cash and therefore wouldn’t have been able to distribute $75k. You would only been able to distribute $40k and in that scenario, you would have had enough basis and there would be no issue related to basis.
@@NaviMarajCPA gotcha... thanks..
You’re welcome!
@@NaviMarajCPA But in your example you only had $1k in cash. With $35k of UNPAID CC debt. So, we never had $35k, only $1k. How is it that we are able to distribute $75k? Shouldn't we only have been able to distribute $41k. The $1k in bank, and $40k in net profits. Wouldn't another loan be the culprit and not strictly the CC debt alone? Perhaps if they distribute from retained earnings more than their outside basis? That would imply more than $1k in the bank though.
Also what if I took out excess distribution due to the 3rd party loans made to the business in which i am the owner and 100 % shareholder
This doesn't make any senese. Why would the bank only have $1k? Wouldn't this example imply that there is some sort of loan that is also a balance sheet liability. Otherwise, how is the owner able to take a distribution in excess of his basis after taking the $41,000. What am I missing exactly? Is this example assuming that we had $35k in the bank, took that $35k with the $40k of profits to make $75k. Since $41k of it ($1k In Basis + $40k profit) was part of his basis, the remaining $34k is excess distribution?
Distribution doesn’t come in form of cash only (in EX above). Sometimes you can’t have a distribution of assets. This causes distribution in excess of “stock basis”.
There was $100,000 that went into the bank account during the year and was taken out ($25,000 in bills & $75,000 to owner). Therefore, only the original $1000 balance is left.
$35k of business credit card debt, I think. In the example, he took a disbursement rather than paying his bills.
License value
Seems like you might be conflating accrual and cash accounting regarding credit cards. If you assume a cash basis of accounting, the expense would be incurred when paid and it would decrease your basis. Your comment about paying off your CC to avoid taxes makes no sense to me. Am I missing something?
It’s a little tricky….what you’re saying makes sense in theory but regarding cash basis taxpayers and credit card expenses…..the expense is “created” when the card is swiped, not when the payment is made. I know it sounds counterintuitive but that’s how it works.
My comment about paying off the CC to avoid basis issues relates to if the taxpayer would have used the cash in their bank account to pay off the credit card then they wouldn’t have been able to use that same cash as a distribution….so they wouldn’t have taken a distribution in excess of their basis thus avoiding the capital gains taxes.
And yet you still haven't explained exactly what a 'basis' is, nor how to calculate it.
Dumb... 14 minutes to poorly "explain" nothing