S-Corp and LLC Shareholder/Partner Basis

S-Corp Shareholder Basis

The shareholder’s basis is increased by the following:

1.                  Stock Purchases

2.                  Capital Contributions

3.                  Ordinary income

4.                  Separately & nonseparately stated income items (including tax exempt income)

5.                  Depletion in excess of the basis of the property

6.                  Loans to the corporation by the shareholder only

The shareholder’s basis is reduced by the following:

1.                  Distributions

2.                  Nondeductible expenses of the corporation (1/2 M&E, penalties, etc)

3.                  Ordinary loss  

4.                  Separately and nonseparately stated loss and deduction items

5.                  Principal repayments of shareholder’s loan

A shareholder’s basis can not be reduced below zero.

Order of basis: first increased by income items, second decreased by distributions and nondeductible expenses and then by losses.  (There is an election available to decrease basis first by losses and then by nondeductible expenses.) (Reg. 1.1367-1(g))

LLC Partner Basis

The partner’s basis is increased by the following:

1.                  Money and Adjusted basis of any property contributed to partnership

2.                  Fair market value of any services the partner performed for partnership (new partnership only)

3.                  Capital Contributions

4.                  Partnership income (including capital gains and tax-exempt income)

5.                  Recourse and non-recourse partnership liabilities (discussed below)

6.                  Excess of depletion deductions over adjusted basis of property

The partner’s basis is reduced by the following:

1.                  Distributions of money or adjusted basis of p/s property

2.                  Nondeductible expenses of the partnership (1/2 M&E, penalties, etc)

3.                  Losses and deductions (including capital losses)      

4.                  Principal repayments of shareholder’s reductions of recourse and non-recourse liabilities

5.                  Special depletion deduction for oil and gas wells

A partner’s basis can not be reduced below zero.

Recourse Liabilities: Recourse liabilities involve a partner personally guaranteeing a liability incurred by the partnership.  For example, if a partnership goes to the bank for a mortgage to buy a building, and the loan documentation states that Partner X will be personally liable if the partnership fails to pay the mortgage, that is a recourse liability.  Partner X will then increase her basis in the partnership by the amount of the mortgage, assuming she is the only partner with a personal guarantee.  If Partner Y did not have a personal guarantee on the mortgage, his basis will not be affected.

Qualified Non-Recourse Liabilities: Qualified Non-recourse liabilities do not involve a personal guarantee by any of the partners;  however, if it is secured by a mortgage by a lending institution in the business of lending money, it will increase the partner’s basis.  For example, if the partnership goes to the bank for a mortgage to buy a building, and the partnership is the only one responsible for the mortgage, that is a qualified non-recourse liability.  Partner X and Y will increase their basis in the partnership by their proportionate amount of the mortgage. 

Other Non-Recourse Liabilities:  Other non-recourse liabilities also increase the partner’s basis.

At Risk Rules:

The distinction made above between other non-recourse liabilities and qualified non-recourse liabilities is important because even though a partner’s basis is increased by his share of non-recourse liabilities, only qualified non-recourse liabilities are considered when determining if a partner can deduct a loss for the year.