Basis Considerations for Partners and Shareholders

Understanding basis is crucial for partners in a partnership and shareholders in an S corporation, as it impacts tax obligations, distribution limits, and loss deductions. Here’s an overview:

1. Initial Basis

• Partnership: Partners’ initial basis is the amount of cash and the adjusted basis of the property contributed, plus any assumed partnership liabilities.
• S Corporation: Shareholders’ initial basis is the amount of cash and the adjusted basis of the property contributed for their shares.

2. Adjustments to Basis

• Partnership:
• Increases: Additional contributions, share of partnership income, and increases in partnership liabilities.
• Decreases: Distributions, share of partnership losses, and reductions in partnership liabilities.
• S Corporation:
• Increases: Additional contributions and share of income.
• Decreases: Distributions and share of losses.

3. Loss Limitations

• Partnership: Partners can deduct losses only to the extent of their basis.
• S Corporation: Shareholders can deduct losses only to the extent of their basis in stock and any loans made to the corporation.

4. Distributions

• Partnership: Distributions reduce basis but are generally tax-free up to the partner’s basis.
• S Corporation: Distributions reduce basis but are tax-free up to the shareholder’s basis. Excess distributions are treated as capital gains.

Best Practices

• Maintain Detailed Records: Accurate tracking of contributions, distributions, income, and losses is essential.
• Consult a Professional: A CPA can provide personalized advice and ensure compliance with IRS regulations.

Why Choose AJB & Associates CPAs?

AJB & Associates CPAs specialize in tax and basis considerations for partnerships and S corporations. Our expertise helps you navigate complex tax laws, ensuring you maximize benefits and remain compliant.

Visit ajbcpas.net to learn more about how we can assist with your partnership or S corporation basis considerations.