Balance Sheets and Basis › Basis_Jan_2011 Slideshow.pdf · ©2011 “Gold Hat” played by...

1

Balance Sheetsand Basis

Tax Buddha

[email protected]

For EBAEA

©2011

“Gold Hat” played by Alfonso Bedoya

2

• Non Compliance Issues– Deducting Personal Expenses– Inadequate Wages– Improperly Calculating Basis

3

HR 4213

Make it all taxable

• Ways to address Basis non-compliance

– Require S Corps to Track Shareholder Basis– Send info on how to track basis to new S

Corps– Provide a clear 1-2 page guide on tracking

GAO-10-195

4

Basis = Equity?

Inside Basis Outside Basis

Entity’s interest in

any contributed

property

Owner’s adjusted basis in

contributed property

IRC 722 IRC 723

Inside Basis = Outside Basis?

5


• Stock $1,000 • Stock $1,000


• Stock $1,000 • Stock $1,000 (taxed)

Money in your pocket isPost-Tax

6


• Stock $1,000• Retained Earn $300

• Stock $1,000 (taxed)• Income $300 (taxed)




• Sale of ownership $1,300 – Tax?




• Sale of ownership $1,300 – Not Taxed!

7




• Sale of ownership $1,300 – Not Taxed!

Basis = $1,000 + $300Sale = $1,300


• Stock $1,000 • Stock $1,000 (taxed)

8



• Stock $1,000 (taxed)• Tax Exempt Income

$250




$250

• Sale of Ownership $1,250 – Tax?




$250

• Sale of Ownership $1,250 – No Tax

9




$250

• Sale of Ownership $1,250 – No Tax

Basis = $1,000 + $250Sale = $1,250

Original Owner



10

Original Owner



Original Owner



• Sale of Stock $5,000

Original Owner




• Gain $3,800 (taxed)

11

Original Owner




• Gain $3,800 (taxed)

Basis = 1,000 + $200

New Owner


• Stock $5,000 (taxed)

Inside Basis = Outside Basis

12

Basis = Equity?

• Stock sale/acquisition only by “cash”• Depreciated property contributed in tax

free exchange• Distributions never in excess of basis• No Debit* basis• Positive retained earnings• No Treasury Stock

External Basis

Decreased by• Business losses taken• Section 179• Non-Deductible Expenses• Repayment of Qualified Loans• Non-Taxable Distributions• Shareholder selling their stockPub 551

13

External Basis

Increased by• Purchase of Stock by shareholder• Income from Corporation taxed to

shareholder• Contributions• Qualified Loans made to corporation

– need ‘economic outlay’ to add basis

Pub 551

$$/Benefits

14

Section 721Basis to Partner

=Basis to Partnership

Section 721



No Gain/Loss recognized on Contribution

15



No Gain/Loss recognized on Contribution

Holding Period Continues

Section 351 Tax Free Exchange

Contributed Property to Corp



If it’s not Controlled, it’s Sold

16



If it’s not Controlled, it’s Sold

Recognize gain/loss at time of contribution

Section 721:Partnerships, No Gain

Section 351: CorporationsNo Gain if Qualifying

Section 721:Partnerships::

Section 351: Corporations:::

Rule:Exception

17

1

Auto Body Shop

18

Auto Body Shop

Auto Body Shop

Auto Body Shop

19

Auto Body Shop

Auto Body Shop

Auto Body Shop

20

Auto Body Shop

Auto Body Shop

Auto Body Shop

21

Auto Body Shop

Auto Body Shop

Assets Book

Cash $100

Duesenberg $100

Capital-Donald $100

Capital-Andy $100

22

Book = Inside Basis

Book = Inside Basis(It is what we say it is)

23

Assets Book

Cash $120

Duesenberg $100

Capital-Donald $110

Capital-Andy $110

Assets Book

Cash $140

Duesenberg $100

Capital-Donald $120

Capital-Andy $120

24

Is It Taxable?

Is It Taxable?

Is It Taxable?

But I didn’t take the money!

25

Is It Taxable?

But I didn’t take the money!

Income istaxed at

least once.

Assets Book

Cash $155

Duesenberg $100

Loan Payable $ 15

Capital-Donald $120

Capital-Andy $120

26

Assets Book

Cash $155

Duesenberg $100

Loan Payable $ 15

Capital-Donald $120

Capital-Andy $120

27

Take $ 40

Assets Book

Cash $115

Duesenberg $100

Loan Payable $ 15

Capital-Donald $100

Capital-Andy $100

Is It Taxable?

28

Is It Taxable?

Once taxed, never taxed again.

Assets Book

Cash $115

Duesenberg $100

Loan Payable $ 15

Capital-Donald $100

Capital-Andy $100

29

Take $ 15

Assets Book

Cash $100

Duesenberg $100

Loan Payable $ 15

Capital-Donald $92.5

Capital-Andy $92.5

Is It Taxable?

30

Is It Taxable?

*

• Am I still on the hook for half of $15 loan?

• It is as if I owe the money, not the partnership.

Assets Book

Cash $100

Duesenberg $100

Loan Payable $ 15


Capital-Andy $92.5

31

Take $ 100

Assets Book

Cash $ 0

Duesenberg $100

Loan Payable $ 15


Captial-Andy $42.5

Is It Taxable?

32

Is It Taxable?

Auto Body Shop

Is It Taxable?

33

Cash Out $50

Basis In :

Deusenberg $25

Name $0

Outside

Sell For $

Sell For $300

34

Is It Taxable?

Assets Book

Cash $ 0

Duesenberg $100

Loan Payable $ 15


Captial-Andy $42.5

Is It Taxable?

35

Duh!

Is It Taxable?“I got $227.5”

36

The formulation of a problem is often more essential than its solution….

---Albert Einstein

Pause

Deducting LossRequires Basis

37

Loss deduction limited to shareholder basis(stock + debt*)

Taking Losses (Outside) Reduces (Outside) Basis

Taking Losses (Outside) Reduces (Outside) Basis

Suspended Losses (Outside) Does NOT Reduce

(Outside) Basis

38

Bead Store

• Start business with $1,000 cash, Basis = ?

Bead Store

• Start business with $1,000 cash

• Buy $500 of inventory, but DON’T pay the vendor.

Basis = ?

39

Bead Store

• Start business with $1,000 cash

• Buy $500 of inventory, but DON’T pay the vendor.

• Pays $500 rent first year in business

Bead Store

• Is First Year Loss of $500 deductible to owner?

40

(Basis = $500 after)

Bead Store

• Entity pays $500 rent in Second Year.

Bead Store


• Still haven’t sold beads, nor paid the vendor.

41

Bead Store


• Still haven’t sold beads, nor paid the vendor.

• Rent expense deductible to owner in Second Year?

(Basis = $0 after)

42

Bead Store

• Entity pays $500 rent in Third year.

Bead Store


• Sold the beads at cost for $500 (used to pay the rent), but vendor not paid.

Bead Store


• Sold the beads at cost for $500 (used to pay the rent), vendor not paid.

• Rent expense deductible to owner in Third year?

43

Bead store

Suspended Loss

Bead Store

• Owner pays the vendor $500 for the beads in Fourth Year by writing a personal check.

Bead Store


• By contributing $500 more, owner now has basis and can take the loss in Fourth Year.

44

Bead Store


• By contributing $500 more, owner now has basis and can take the loss in Fourth Year.

• (and should probably go out of business)

Bead Store

• What if the business takes out a LOAN instead of “borrowing” from a vendor?

Loss deduction limited to shareholder basis(stock + debt*)

No credit for corporate debt to outside basis

45

Bead Store

Does a “Loan” create Basis?

It Depends…

Who owes the money, nominally?

Another Example

46

2

10 Piece Band

• 10 Partners in a Partnership

10 Piece Band


• 1 Partner, Kyle, quits, wants his “fair share” and wants to know his basis

47

10 Piece Band


• 1 Partner, Kyle, quits, wants his “fair share” and wants to know his basis

• Kyle gets all ‘lawyered up.’

10 Piece Band

• Each Partner owns 10%

10 Piece Band


• Each Partner contributed $1,000 cash

48

10 Piece Band


• Each Partner contributed $1,000 cash

• Each Partner contributed a Tuba

10 Piece Band

What is Basis for Kyle?

$21,016 assets/10 partners

=

$2,101.60?

10 Piece Band

What’s the story, Asset by Asset?

49

10 Piece Band

• In the Beginning (3-16-01):

– Kyle Contributes $1,000 Cash

Kyle’s Basis• $1,000 – Cash

$1,000.00 Total Basis

10 Piece Band

• In the Beginning (3-16-01):

– Kyle Contributes $1,000 Cash

– Kyle Contributes Golden Tuba $7,000

50

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba


Only 10% Ownership?

Kyle’s Basis

• Where did the money come from to purchase assets?

• Who benefits from depreciation?

51

10 Piece Band

• Kyle has received benefit of 10% of the depreciation on HIS CONTRIBUTED TUBA, or $700

10 Piece Band


Now that it is a Partnership Asset, Kyle only gets his portion of the Depreciation

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba


52

10 Piece Band


AND

• Kyle has received benefit of 10% of the depreciation on the OTHER NINE TUBAS, or $3,500

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba• Less $3,500 – Depreciation on 9 Tubas

$3,800 Total Basis

10 Piece Band

• Group buys a Mixer 6-10-05 for $2,010

53

10 Piece Band


• Kyle “owns” 10% of the mixer

54

10 Piece Band


• Kyle “owns” 10% of the mixer

• Kyle has received benefit of 10% of the depreciation

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba• Less $3,500 – Depreciation on 9 Tubas• $44.90 – Mixer


10 Piece Band

• Group creates a Copyright for “Tubas on the Beach” 4-15-08 for $1,500

55

10 Piece Band


• Kyle “owns” 10% of the Copyright

10 Piece Band


• Kyle “owns” 10% of the Copyright

• Kyle has received benefit of 10% of the amortization

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba• Less $3,500 – Depreciation on 9 Tubas• $44.90 – Mixer• $128.20 – Copyright


56

10 Piece Band

• Group buys inventory for $5,500

• Kyle “owns” 10% of the inventory

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba• Less $3,500 – Depreciation on 9 Tubas• $44.90 – Mixer• $128.20 – Copyright• $550 – Inventory


10 Piece Band

• Group buys Microphones 7-15-09 for $5,000

57

10 Piece Band


• Kyle “owns” 10% of the Microphones

10 Piece Band


• Kyle “owns” 10% of the Microphones

• Kyle has received benefit of 10% of the depreciation

Kyle’s Basis• $1,000 – Cash• $7,000 – Golden Tuba• Less $700 – Depreciation on Golden Tuba• Less $3,500 – Depreciation on 9 Tubas• $44.90 – Mixer• $128.20 – Copyright• $550 – Inventory• $428.50 – Microphones


58

Kyle’s Basis

• Not 10% of Balance Sheet $2,15.16 –Inside Basis

• Kyle’s Basis = $4,951.60

Kyle’s Basis

• If contributions were all equal, and disbursements were all equal, the 10% WOULD have worked.

Kyle’s Basis

59

Kyle’s Basis

• Kyle takes the Golden Tuba

Kyle’s Basis


• FMV = $4,000

Kyle’s Basis


• FMV = $4,000

• Basis $4,951.60 – Tuba $4,000

= $951.60 Loss

60

Kyle’s Basis


Kyle’s Basis


• FMV = $7,000

Kyle’s Basis


• FMV = $7,000

• Basis $4,951.60 – Tuba $7,000

= $2,048.40 Gain

Balance Sheets and Basis › Basis_Jan_2011 Slideshow.pdf · ©2011 “Gold Hat” played by...

Documents

Transcript of Balance Sheets and Basis › Basis_Jan_2011 Slideshow.pdf · ©2011 “Gold Hat” played by...