S Corporation owner's basis is stock value
plus loans from the owner to the S corporation plus S Corporation profits minus S
Corporation losses minus distributions to the owner. S corporation basis is important
since an owner cannot take out more money than the owner has put in and the corporation earned
without paying taxes. S Corporation owners cannot report a loss from an S corporation on their tax
return if they have a negative basis. They do have to report profits even if there is
negative basis.
Partnerships have two sets of basis, inside
basis and outside basis. Inside basis is the basis that the partnership tax records
compute for each partner. Inside tax basis is the initial investment (cash or the value of
some other asset) plus profits minus loses minus distributions. Outside basis is what the
tax rules say a partner's share has cost the partner. Outside basis is effected by what
the tax rules say the investment in the partnership is worth. Outside basis begins with
the basis of the partners original investment plus profits minus loses minus distributions. As an
example, John's father and Mary's father each put $1,000 into a partnership. The
partnership buys a piece of land for $2,000. There are never any profits or losses. Years
later the land is worth $1,000.000. John's father gives John his partnership interest. As
a gift, John assumes his father's basis of $1,000. John's outside partnership basis is
$1,000. Mary's father dies and she inherits her father's partnership interest. As an
inheritance, Mary can step up the basis to fair market value. Mary's outside partnership
basis is $500,000. John and Mary put their partnership interests into a new partnership.
Their inside basis in the new partnership is $500,000 each, half the value
of the land. John's outside basis is still
$1,000 and Mary's is $500,000.
Your Home
The basis of your
home is the original purchase price plus closing costs and points that have not been
deducted plus permanent improvements. Improvements do not include maintenance items like
painting. If you deferred a gain from a home sale prior to May 6, 1997, your basis is
reduced by that deferred gain. If a depreciation deduction was taken for the rental or
business use of your home, then your basis is reduced by the amount allowed to be
deducted.
Inside Outside Basis has been the most popular search term
creating traffic for this web site. The discussion in Partnerships
above was not intended to be authoritative but rather a simple example for
the need of professional advice.
