| My father owns a S Corp. He has never kept track of his stock basis. He's somewhere in the positive (since he pays himself mostly in wages rather than distributions). Most years his distributions are only 1-5% of his wages. ====>> It is not the corporation’s responsibility to track a shareholder’s stock and debt basis; rather it is the shareholder’s responsibility. The accountant of the shareholder , an EA/a CPA needs to calculate basis each year in order to prepare their personal tax returns. Basically, it is important for the shareholder/EE of an S corp to know his basis in the shares of stock that he owns as well as loans made to the company. His basis is used to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property. Unlike a C corp, each year the stock and debt basis of an S corp may change based upon the S corp’s operations and financing arrangements. Every year the S corp is required to issue a shareholder a Sch K-1. The K-1 reflects the S corp’s income, loss and deductions allocated to the shareholder for the year.The taxable amount of distribution is contingent on the shareholder’s stock basis.
He paid his employees at end of 2014 but didn't get reimbursed by his clients for those wages until 2015. His profit and loss will be showing as - $30,000 for 2014.============>>>>>>As mentioned above, keeping/tracking stock basis of his S corp is important; aslongas he, as a shareholder, is allocated an S corp loss or deduction flow-through, he must first have adequate stock and debt basis to claim that loss or deduction. As a sole owner of the S corp , closely held S corp, he needs to receive some sort of tax planning before year end, including a review of his current basis in any S corp stock. Failure to do so can have costly consequences. Your father may not be able to claim unreimbursed expenses UNLESS he carried sufficient basis in the S corp; he can deduct any wages he pays to employees, and most employee benefits, by listing them as expenses on his Form 1120-S.he may include any fica taxes he pay, including the employer's portion of these taxes on his own salary as he is a shareholder/employee of the corp. only the percentage of his compensation attributable to salary carries an obligation to pay payroll taxes, not any dividends or distributions his corp issues to shareholders.
Is this a major problem? He's never been in the negative before. I read over some stuff on debt basis and it is confusing to me. My father doesn't take advantage of what the s-corp offers in way of generally better tax savings but I don't want him to be majorly penalized either===========> As mentioned above, aslongas his stock/debt basses were sufficient , he can deduct the bad debt expenses as he reports corporate income or loss on the personal income tax return on 1040 for the year in which the corp year ends in 2014. Losses or deductions passed through to him first reduce his stock basis/AAA basis in S corp. After stock basis has been reduced by the bad debt amount, remaining loss amounts are applied against debt basis loan baiss Imean if he has. Debt basis is not reduced by passthrough losses or deductions if the debt has been satisfied, disposed of, or forgiven during the corporation’s tax year. A “net increase” in 2015 by being reimbursed by the client, first restores debt basis to the extent debt basis has been reduced by losses or deductions in tax years beginning after 1982 . A “net increase” is, generally, the amount by which the sum of passthrough income and gains exceeds the sum of passthrough loss, deductions, and distributions.
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