Your Accountant Must Calculate Your Tax Basis Annually

By James R. Leichter

What is my tax basis in my S-corp?

In computing stock basis, the shareholder starts with their initial capital contribution to the S-corporation or the initial cost of the stock they purchased (the same as a C corporation). That amount is then increased and/or decreased based on the pass-through amounts from the S-corporation.

What is my tax basis in my partnership?

A partner’s tax basis in the partnership generally equals the adjusted basis of property contributed or cash paid plus any income recognized by the partner on the formation of the partnership, plus the partner’s share of the liabilities of the partnership under 26 U.S.C. § 752.

Why does any of this matter?

Calculating the S-corporation shareholder’s basis correctly is important because it measures the amount the shareholder can withdraw or receive from the S-corporation without realizing income or gain. In a partnership, a partner’s ability to take partnership losses on their individual income tax return may be limited if the ending tax basis is negative. Similarly, if a partner receives from the partnership a cash or noncash property distribution that is more than their tax basis, then the excess may be taxable income to the partner. The gain or loss a partner recognizes on the sale of his partnership interest is calculated using his tax basis. If a partner receives cash or other consideration that is more than their tax basis, then he or she should recognize a gain on the sale of his partnership interest on his individual income tax return.

Watch Your Limit and Do Not Exceed It

There is a limit on the amount of losses and deductions that a partner of a partnership or a shareholder of an S-Corporation can deduct. Many company that we work with have exceeded this amount and have accumulated a severe liability.

Need a Better Accountant?

If your accountant is not have conversations like this one with you, you may not have an accountant, you may only have a tax preparer.

About RA Tax and Accounting – The Nationwide Contractor’s Choice

If you are looking for a high-performance accounting firm that specializes in the contracting industry, then RA Tax and Accounting is a top choice. We are laser-focused on the HVAC, plumbing, electrical, and related industries. We offer full bookkeeping, accounting, tax planning, income tax form preparation, IRS representation, registered agent, deal with IRS notices, and specialized financial consulting. We also offer software training for QuickBooks, Sage, and Aptora products.

About Aptora

They make an award-winning software suite built to manage all aspects of a contracting business. Aptora’s Total Office Manager® was designed by James Leichter, a well-known industry expert and founding faculty member of EGIA Contractor University. This super tool is the most complete, feature-rich, and customizable business management system of its kind. Residential to commercial, service to new construction, we have you covered. There is no need for expensive clunky add-ons to make it work and you won’t outgrow it. It completely replaces QuickBooks® but you keep your historical QB financial information. Your data is securely stored in a Microsoft SQL Server database which you fully control. If you decide to leave, your data is not held hostage, as many companies do. We are most proud of the tight relationship we have with our users. In fact, they drive our software development. That’s because we’re really in the people business; we just happen to make great software.