Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
S corporation Capital Accounts and Tax Basis
Since an S corporation is a pass-through entity, Income, losses, and other items, are passed-through the S corporation to its shareholder(s) according to their ownership percentage in the corporation. Each shareholder's ownership percentage is reflected in his own individual capital account (e.g., Jack Jones, Capital). Capital accounts appear in the stockholders' equity section of the balance sheet.
Each shareholder's capital account must be maintained accurately in order to allow for an accurate allocation to each shareholder of all pass-through items and to be able to compute gain or loss should a shareholder sell his stock.
Capital accounts
Initial basis in shareholder's stock:
When an S corporation is formed, each investor will generally contribute money and/or property to the corporation in return for stock. Each shareholder's initial investment represents his beginning "stock basis".
A capital account is set up for each shareholder. For example, if John Smith and Jack Jones were the initial investors, they would each have a separate capital account - John Smith, Capital and Jack Jones, Capital. Each shareholder's initial stock basis equals his initial investment.
Adjusted basis in stock:
After the initial investment is made by each shareholder, each shareholder's capital account may be adjusted up or down for certain items. For income items, basis is increased. For losses and shareholder distributions, basis is decreased. The remaining balance after adjustment are made is referred to as the shareholder's adjusted stock basis.
Tax Basis
Tax basis represents the total of two items:
- Stock basis and
- Loan basis (also called debt basis).
For example, if you invest $10,000 for stock in the S corporation and personally lend the S corporation $2,000, your tax basis is $12,000 (stock basis of $10,000 plus loan basis of $2,000).
Ordering Rules:
Items that reduce tax basis (stock basis plus loan basis (if any), must be reduced in the following order:
- Stock basis is reduced first, but not below zero
- Loan basis is reduced next, but not below zero
Example:
- You invest $10,000 for 100 shares of stock and lend the S corporation $2,000
- Your friend Jack invests $10,000 for 100 shares of stock
- Each of you own 50% of the stock, and therefore, will share in the income, deductions, credits, gains, and losses equally (50%/50%).
- Your tax basis is $12,000 (stock basis of $10,000 and loan basis of $2,000)
- Jack's tax basis is $10,000 (equal to his stock basis)
- At the end of the tax year the corporation has $50,000 of net income
- You and Jack are each allocated $25,000 (50% each) of the net income
- Schedule K-1 is issued to both you and Jack after the end of the tax year reporting the net income allocation.
What you and Jack must do:
- You and Jack must each report your $25,000 share of net income on Schedule E (which is attached to Form 1040). This is true even if no funds were actually distributed to either of you.
- You and Jack increase your stock basis to $35,000 (original investment of $10,000 plus $25,000 share of net income).
- Your tax basis is now $37,000 (stock basis of $35,000 plus $2,000 loan basis)
- Jack's tax basis is $35,000 which is equal to his stock basis ($10,000 plus $25,000). Jack did not lend any money to the S corporation, and therefore, has no loan basis.
- You both include your $25,000 share of the profits in your individual income return.
Shareholder distributions:
Distributions to shareholders are tax-free up to the amount of the shareholder's stock basis, unless the distribution exceeds a shareholder's stock basis (see more on this below).
Note that loan basis is not considered when determine if there is a capital gain. In other words, if you have a stock basis of $10,000 and loan basis of $2,000 and you receive a distribution of $11,000, you have a capital gain of $1,000 ($11,000 minus $10,000). The $2,000 loan basis is irrelevant.
Key Points
- Schedule K-1 shows the amount of non-dividend distributions to shareholders; it does not state the taxable amount of a distribution.
- The terms, non-dividend distribution and dividend distribution can be a cause of confusion. Non-dividend distributions are tax-free to the extent of the shareholders stock basis. Dividend distributions are taxable (the shareholder would be issued Form 1099-DIV). This is because, such dividends represent the remaining balance of a C corporation's retained earnings that existed on the date of conversion to S corporation status. In other words, they represent previously undistributed C corporation retained earnings.
- The taxable amount of a non-dividend distribution depends on the shareholder's stock basis; loan basis (also called debt basis) is not considered. Loan basis represents what a shareholder has personally lent to the S corporation.
- If a shareholder receives a non-dividend distribution that exceeds the his/her stock basis, the excess amount is a short-term or long-term capital gain, depending on the shareholder's holding period of the stock.
- A non-dividend distribution decreases stock basis. A dividend distribution does not (it is taxable).
Tracking Stock Basis and Loan Basis
- It is not the corporation's responsibility to track a shareholder's stock basis or loan basis; it is the shareholder's responsibility.
- You may not reduce your stock basis or loan basis (if any) below zero.
- If a shareholder sells his stock, suspended losses due to basis limitations are lost.
- Any gain on the sale of stock does not increase the shareholder's stock basis.
Repayment of Loan to Shareholder by S corporation Could Result in Taxable Income
If you personally lend money to your S corporation you will either create a loan basis, if it's the first time you've lent money to the business, or add to your existing loan basis, if you previously lent money to the business which has not been fully repaid.
In any event, when the S corporation pays you back, you may have to include all or part of the repayment in taxable income depending on the amount by which the repayment amount exceeds your loan basis.
Example:
- An S corporation has a $10,000 loss.
- The S corporation has one shareholder who has an $8,000 stock basis and a $3,000 loan basis (the shareholder personally lent his company the $3,000).
- The S corporation repays the shareholder his $3,000 loan.
Result:
- To deduct the full $10,000 loss, the shareholder must have sufficient basis; which in this case, he does; he has a tax basis of $11,000 (stock basis of $8,000 and loan basis of $3,000).
- The shareholder must first reduce his stock basis, but not below zero. So, he subtracts $8,000 of the loss from his $8,000 stock basis, bringing it down to zero.
- Next, he reduces his loan basis by the remaining $2,000 of loss, bringing his loan basis down to $1,000.
- Since the shareholder's loan basis was reduced to $1,000 and the loan repayment amount was $3,000, the loan repayment exceeded the loan basis by $2,000 which represents taxable income for the shareholder ($3,000 repayment minus loan basis of $1,000)