June 17, 2020 at 2:54 pm #3028683ImiParticipant
Hi. My REG exam is in 1 month and I was going through S Corp questions in Roger and got confused between two questions that were about distribution.
1) Paige, a 25% shareholder in an S corporation, had a stock basis of $10,000 at the beginning of the year. The corporation had ordinary income of $200,000 for the year. There were no separately stated items. Paige received wages from the corporation of $25,000 and a distribution of $30,000. What was Paige's basis in the stock at year end?
Explanation: Paige's initial basis of $10,000 will be increased by 25% of the S Corporation's $200,000 in income, or $50,000, and will be reduced by the distribution of $30,000. As a result, the basis will be $10,000 + $50,000 – $30,000 or $30,000. The salary does not affect Paige's basis.
2)Monie, an individual taxpayer, owns 50% of Monie & Co, an S corporation. At the beginning of 20X4, Monie’s basis in Monie & Co was $55,000. During 20X4, Monie & Co realized ordinary loss in the amount of $45,000 and a short-term capital loss of $15,000. Monie & Co made total distributions of $70,000 to its shareholders during this taxable year. What amount of the $70,000 distribution is taxable to Monie?
Explanation: The distribution is thus applied to basis prior to the loss items. Because Monie is a 50% shareholder, the distribution amount is $35,000 (70,000 / 2 = 35,000). This $35,000 distribution decreases Monie’s basis to $20,000. Monie’s share of the loss items then decreases Monie’s basis to zero but no lower, since basis cannot be negative. There is no taxable distribution in excess of basis because the distribution must be accounted for first and does not exceed Monie’s basis.
My question is why are they dividing the distribution in second question? Instead of subtracting 35,000 of distribution, from the basis, shouldn't we subtract the whole thing 70,000? In question 1, when they subtracted full distribution of 8,000, eventhough Paige was 25% shareholder. Does the percentage of ownership affect distribution?
This might be a simple thing but this basis thing is very difficult to understand. Any help and tips would be appreciated.
Thank you!June 17, 2020 at 4:31 pm #3028761ElaineParticipant
Yes, percentage of ownership DOES affect distribution- Monie is a 50% shareholder which is why they’re dividing it. I think you have to pay attention to the words “total distribution” in the second question whereas the first question says that “Paige received…a distribution of $30,000” so they’re already telling you her share-you don’t need to divide anything.
I was confused at first too but when you practice enough questions, you’ll get used to them. Good luck!June 18, 2020 at 12:18 pm #3029385ImiParticipant
Thank you Elaine. That made sense. I will make sure to read the question carefully.