Liquidating s corp

Determining Individual Stock Basis As with C corporation stock acquisitions, an S corporution shareholder may have different bases in separately acquired shares of stock.As a result, the tax treatment of distributions will differ depending on the stock's basis (i.e., a distribution could generate a taxable gain for stock with a low basis, while at the same time be a tax-free retum of capital for stock with a high basis).The stock basis is reduced by the amount of any separately or non-separately stated loss items.

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The consequences of distributions to the shareholders and the corporation are discussed further.

Shareholders in an S corporation must keep careful track of their tax basis.

In essence, the ordering rule allows shareholders to "borrow" basis from anticipated net income at the end of the year while receiving distributions during the taxable year.

Since adjustments to basis are made at the end of the year, the shareholder's basis at the time of the distribution is irrelevant. These rules limiting losses and allowing tax-free distributions up to the amount of the shareholder's adjusted basis are similar in certain respects to the rules governing the treatment of losses and cash distributions by partnerships.

The shareholder's oil and gas depletion deduction; c. Non- separately computed losses that pass through; and e. Reducing stock basis for non-deductible items prevents a shareholder from converting a non-deductible expense at the corporate level into a deductible expense when stock is sold or a liquidating distribution is received.

Distributions in excess of basis are treated as gains from the sale of stock.What is the January 1, 1993, tax basis for her stock? OPERATINGRESULTS Year Ended December31,1992 Ordinaryincome8,000 Rentalrealestateloss(37,000) Interestincome8,000 Netlong-termcapitalgain22,000 Charitablecontributions(3,000) Section170expense(7,000) Shareholder'sportionofmedicalinsurancepremiums(1,200) Non-deductibleportionofcorporationmealsand entertainmentexpense(6,000) Keypersonlifeinsurancepremiums(9,000) Even though the nondeductible items do not reduce Linda's current taxable income from the corporation, they do reduce her stock basis.Her current taxable income from the corporation would be 7,700.Debt Qualifying as Basis If an S corporation shareholder desires to take immediate deductions rather than wait until the S corporation is profitable, it is important to be aware of how to create S corporation basis.Additional cash contributions or the acquisition of corpo- rate stock will increase a shareholder's stock basis.The Timing of Basis Adjustments All basis adjustments are deemed to occur on the last day of the corporation's tax year or on the date the shareholder sells his or her stock, if earlier.

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