IRS Tax Form 1120-S CPA gives an example of Stock Basis in S Corporations

Form 1120-S CPAs track stock basis for S Corporation clients. This post explains what S Corporation stock basis is, why it’s important and what factors into the calculation; followed by a simple example. Note IRS tax Form 1120-S doesn’t explicitly present your stock basis.

Our website has many postings on S Corporations and Form 1120-S tax preparation topics. Just click Form 1120-S or S Corporation in the drop down lists in the right sidebar. This particular posting was inspired by an outstanding article in the January 2012 Journal of Accountancy, a house magazine that the American Institute of CPAs distributes to members.

What is S Corporation Stock Basis?

As a Form 1120-S CPA, I think of the shareholder’s stock basis as the amount of money the shareholder has invested in the company at a particular point in time. And stock basis changes with time.

Why is Stock Basis Important?

On Form 1120-S, it is the amount the shareholder can withdraw from the company without the IRS calling it income or gain.

When does Stock Basis become Important?

• At tax time, it affects the shareholder’s tax liability indirectly through Form 1120-S’ Schedule K-1.
• When the S Corporation has losses.
• The S Corporation makes distributions to shareholders.
• When the stock is sold, or the company changes hands.

OK, So, What’s the Problem?

If you had a CPA on the case, from the beginning of the company, there usually isn’t a problem. We try to clear any annual problems with stock basis issues and track it from year to year. But imagine a CPA called in when the company is being sold and there aren’t good records that track stock basis. Reconstruction is difficult. In some cases, it could be more cost efficient just to declare the entire sale amount as gain rather than piecing together nebulous data. Sad but true.

Factors in Stock Basis

Increases:

• Initial stock price.
• Ordinary income.
• Subsequent capital contributions.
• Gains.
• Investment income.

Decreases:

• Charitable contributions (which flow to the shareholder’s Form 1040).
• Non-deductible expenses like 50% of entertainment costs, business gifts over $25 to an individual, etc.
• Section 179 deductions (initial expensing of assets).

Simple Example of S Corporation Stock Basis – First Year

• Initial Cost of Stock: $1,000.
• Contribution of Assets: $2,000.
• Ordinary Income: $2,000.
• Section 179 Expense: -$200.
• Cash Distributions: -$800
• Stock Basis: = $4,000

We’re a CPA firm operating as an S-Corporation, good incentive to keep current on Form 1120-S issues! While the physical office is in Wilmington NC, our virtual office serves long distance and international clients. There are hundreds of postings on this site to help you get evaluate us. If you don’t have a Form 1120-S CPA, consider giving us a call for a free phone consult at (910) 399-2705.

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