Interaction of the AMT and S corporation basis rules (Part II): this two-part article examines how the alternative minimum tax affects S corporation basis. Part II covers ordering rules, gift and estate transactions, compensation, C-to-S conversions, distributions, carryovers and other issues and planning considerations.
* In many situations, a significant difference can occur between S corporation income and loss for regular tax and AMT purposes.
* AMT adjustments can change profits to losses, and vice versa.
* Well-maintained basis schedules help to identify clients with significant basis differences under the regular tax and AMT.
This article addresses the interaction between S corporations and the alternative minimum tax (AMT). Part I, in the January 2007 issue, analyzed timing differences, acquisition of S stock and changes in debt basis. Part II, below, discusses the effect of the AMT on ordering rules, gift and estate transactions, compensation-related transactions, C-to-S conversions, distributions and suspended carryovers.
Basis adjustments must be made in the order prescribed in the Code and regulations. The differing treatment of items for regular tax and AMT purposes interacts with the basis-ordering rules to produce some interesting situations.
Under Sec. 1368(d)(1) and Regs. Sec. 1.1368-1(e)(2), basis is first adjusted by all income items passed through to the shareholder, whether separately stated or not. The second adjustment to basis is for any distributions made during the year. Distributions cannot reduce basis below zero. Any basis that remains after the reduction for distributions, losses and deductions (whether or not separately stated) can then be taken into account. If deductions or losses exceed basis, basis is reduced to zero; the excess deductions or losses are treated as having been incurred in the succeeding year, under Sec. 1366(d)(2).
As usual, when the AMT enters the picture, the thinking becomes counterintuitive. AMT adjustments can change profits to losses and losses to profits and, thus, change the effect of distributions when regular tax basis is insufficient to cover them.
Example 1: A is the sole shareholder in an S corporation. She has a stock basis of $90,000 for regular tax purposes and $95,000 for AMT purposes. She has a $25,000 nonseparately stated loss for regular tax purposes and a $4,000 Sec. 1231 gain. A took a $100,000 distribution from the corporation during the year. She has an AMT adjustment of $40,000 (for depreciation) and a negative $15,000 AMT adjustment related to the Sec. 1231 gain.
A does not have sufficient regular tax basis to cover the distribution and must report the $6,000 excess as capital gain under Sec. 1368(b)(2).The $25,000 nonseparately stated loss is carried over for regular tax purposes as a loss suspended due to lack of basis, but this is not the case for AMT purposes. For AMT purposes, the $25,000 nonseparately stated loss was adjusted upward by the $40,000 depreciation adjustment, to become $15,000 nonseparately stated income. Because this is a profit instead of a loss, it is added to AMT basis before taking into account distributions. As a result of this shift, A now has sufficient basis, for AMT purposes only, to absorb the entire $100,000 distribution. Because A has adequate AMT basis to cover the distribution, the $6,000 capital gain is reported only for regular tax purposes. For AMT purposes, a negative $6,000 adjustment needs to be made to taxable income to arrive at alternative minimum taxable income (AMTI).
The separately stated $4,000 gain for regular tax purposes was adjusted downward by the $15,000 AMT adjustment to become an $11,000 separately stated loss for AMT purposes. Due to the ordering rules, this is taken into account after the distribution has been given effect. After the distribution has reduced basis for AMT purposes, there is insufficient basis to fully deduct the separately stated loss. The $1,000 excess of loss over basis will be carried over for AMT, but not for regular tax, purposes.
It is not always as easy, in practice, to match AMT adjustments with the separately stated income or loss items. For example, the depreciation adjustment may relate to several different S corporation activities that are required to be separately stated. If an S corporation has an active trade or business and also has a separately stated item of income or loss (such as rental real estate reported as a passive activity), the AMT adjustment attributable to each activity could change the activity's net profit to a loss or vice versa. As shown in the exhibit on p. 100, this can change the order in which the activity is taken into account when determining the treatment of distributions. Sec. 1366(b) and Regs. Sec. 1.1366-1 require that an S corporation must report separately stated items. Regs. Sec. 1.55-1 requires these hales to be applied in making AMT computations. Yet, the Sec. 56(a) (1) depreciation adjustment will typically be reported as a single number on Form K-1, Shareholder's Share of Income, Deductions, Credits, etc. Additional information could change the outcome in a situation similar to Example 1; tax advisers should consider requesting additional information when necessary.
Gift and Estate Transactions
S corporations are often used for family businesses. It is not uncommon for the senior generation of a family to consult its tax practitioner about gifting stock in the family corporation. Consequently, tax advisers should be aware of some of the odd situations to be encountered in gift transactions of S stock, when the stock has a different basis for regular tax and AMT purposes. Gifts may result in different stock basis for regular tax and AMT purposes when basis is limited to lower of fair market value (FMV) or basis, and FMV lies above either regular or AMT basis or between the basis for regular tax and AMT purposes. (12)
Sec. 1015 and Regs. Sec. 1.1015-1 provide that the transferee assumes the transferor's basis in gifted property, unless the basis exceeds the property's FMV at the time of the transfer. For purposes of determining a loss, FMV is used as basis if it is less than the transferor's basis. The regulation gives an example (13) of property with a $100,000 basis and $90,000 FMV at the time of the gift. The basis for gain purposes is $100,000, while the basis for loss purposes is $90,000. The example indicates that, if the property is sold for $95,000, there is neither gain nor loss.
It is unclear how broadly the word "loss," as used in Sec. 1015, should be construed. Does it only apply to sale transactions, or would it apply as a lower limit on pass through losses and distributions? It would appear that it encompasses both losses by sale and operational losses passed through. There is no specific guidance on this point; the practitioner must apply his or her own judgment.
Is the $10,000 differential in Example 1 a permanent difference? Lack of any language indicating that the difference is temporary would seem to indicate that it is permanent. For example, assume the property in the regulation's example is 100% of the S corporation's stock; the corporation reports $10,000 income per year for five years ($50,000 total) and a $150,000 loss in year six, after the gift. Does the shareholder--donee deduct $150,000 ($100,000 donor basis + $50,000 income reported) in year six, or only $140,000 ($90,000 loss limit + $50,000 income reported)? It would appear that the lower limit would apply, with the excess loss being carried forward under Sec. 1366(d). Under this assumption, anyone preparing basis schedules for a client in this situation should make a permanent notation regarding the difference. Differences between basis for regular tax and AMT purposes adds further complications.
Example 2: M gifts S corporation stock to her children when her regular tax basis is $50,000 and her AMT basis is $60,000. If the gifted stock's FMV exceeds $60,000, her children will assume her separate bases for regular tax and AMT purposes. If FMV is between $50,000 and $60,000, her children will be entitled to use her basis for regular tax purposes, but will have to use the stock's FMV for AMT purposes. If the stock is worth less than either the regular tax or AMT basis, the stock's FMV will be used by the children as their basis for both regular tax and AMT purposes. The regular tax and the AMT basis schedules will have to be annotated as to the potential effect of the different loss limits.
Consider the possibilities when the stock donees call the tax adviser a few years later and ask the tax implications of gifting the same stock to their children. Does the differing basis rule of the original donor pass through to successive donees? The IRS has not addressed this; the tax adviser will have to apply his or her best judgment.
In an estate context, S corporations also have several rules that can affect basis. Normally, the beneficiary receiving S stock from a decedent will take a basis pursuant to Sec. 1014, generally equal to the stock's FMV at the date of death or the alternative valuation date. The beneficiary-shareholder would use that value for both regular tax and AMT basis.
Differences between regular tax and AMT basis occur when the corporation has income in respect of a decedent (IRD) at the date of death. Under Sec. 1367(b)(4)(B), a beneficiary-shareholder must reduce basis for IRE), as delineated in Sec. 691 and Kegs. Sec. 1.691(a)-1(b). Generally, IRD includes any income to which the decedent would have been entitled at the time of death, but which had not been reported under his or her method of accounting. A common example is cash-basis receivables. Some income items may be IRD for both regular tax and AMT purposes, but in differing amounts. Installment-sale receivables stemming from the sale of real property that had different basis for regular tax and AMT purposes will have different amounts of unreported profit and, thus, different adjustments to the inherited stock basis. Cash-basis contract receivables would be IRD items. Contracts reported under the completed-contract method may be IRD. Because these types of contracts often have a different basis for regular tax and AMT purposes, the differing amounts of the earned revenue remaining unreported at the decedent's death would change the inherited stock's basis. This will leave a beneficiary with differing stock basis for regular tax and AMT purposes.
Compensation is another area in which differing limits can produce interesting results. For example, an S shareholder who acquires stock via an incentive stock option (ISO) will have a regular tax basis equal to the exercise price, but will have an AMT basis equal to the stock's FMV at the time of exercise. (14)
Example 3: G is the valued manager of an S corporation. To keep her, the company offers her an ISO for 10,000 shares under a qualified Sec. 422 plan. The option is exercisable at $10 per share, the stock's FMV when the option was granted. Three years later, G exercises the option, when the stock is worth $50 per share.
For regular tax purposes, G will have $100,000 basis (10,000 shares x $10 option price). She will have a $400,000 tax preference to report. Her basis in the stock for AMT purposes will be $500,000. If the company passes through losses after she acquires her stock, her basis for regular tax purposes will be quite low, but her AMT basis will be quite high. Similarly, distributions in excess of basis, reportable as capital gain, may well occur for regular tax purposes, but will be considered a tax-free return of capital for AMT purposes.
As a practical matter, ISOs seem to be much more common in larger C corporations and, thus, not frequently encountered in S corporation practice. It is still an issue worth mentioning, however, because the maximum number of shareholders in an S corporation has been increasing. Thus, larger corporations may be seeking S status, bringing with them the more sophisticated compensation structures, such as ISOs.
Prior to the enactment of the Pension Protection Act of 2006 (PPA '06), conventional wisdom was that an S shareholder had to reduce S stock basis by the FMV of any property contributed by the S corporation to a qualified charity. Because basis for regular tax and AMT purposes may differ, the charitable deduction that could be taken in any given year could vary between regular tax and AMT if the stockholder was limited by basis under either system.
Example 4: M is the sole shareholder of an S corporation in which he has a $20,000 basis for regular tax purposes and $30,000 for AMT purposes. The corporation donated property in 2006 with a $25,000 FMV to charity. M is limited to a $20,000 deduction for regular tax purposes, but allowed the full deduction for AMT purposes. The $5,000 balance is carried over to the succeeding year, for regular tax purposes only.
The PPA '06 changed this rule, via the addition of a sentence to Sec. 1367(a)(2). This provision, which applies only to tax years beginning after 2005 and ending before 2008, changes the basis-reduction rule from FMV to the corporation's basis in the property contributed. If an S corporation contributes property to charity with a basis that differs for regular tax and AMT purposes, the basis flowthrough would presumably reduce the S shareholder's stock basis by a different amount for regular tax versus AMT purposes.
When a C corporation making an S election owns depreciable property in which there is a difference in adjusted basis for regular tax and AMT purposes, the reversal of the difference over time after the S election will result in a lower AMT basis for the S shareholder. The same will hold true for other AMT adjustments.
Does the fact that the corporation may have been exempt from AMT under the Sec. 55(e) small-corporation exception change this result? Sec. 55(e) exempts small C corporations (generally, those with gross receipts of less than $5 million) from application of the AMT. It appears that an exempt corporation that elects S status will not pass through some tax preferences and adjustments (such as depreciation on assets placed in service before the effective date of the S election) to shareholders. Sec. 55(e)(1) states that a corporation that meets the size limit will be deemed to have a tentative minimum tax of zero. Sec. 55(e)(2) states that, in any year in which the corporation no longer qualifies under Sec. 55(e)(1), the adjustments described in Sec. 56 will only be applied to assets and contracts acquired after the corporation no longer qualifies.
Should the statute be read to mean that Sec. 55(e)(2) will apply any time an entity fails to qualify under Sec. 55(e), either because it has exceeded the gross-receipts test or because it is no longer a corporation subject to the minimum tax due to an S election? There is no authority on point. The following example assumes that an S election is an event that would cause a corporation otherwise qualifying under Sec. 55(e)(1) to no longer be described by that section.
Example 5: B is a small construction company, taxed as a C corporation, that has averaged less than $5 million in revenue and, thus, is not subject to AMT, according to Sec. 55(e). B has assets that have been depreciated using accelerated depreciation and a contract reported on the completed-contract method. At the time B makes an S election, it has not reported any profit, as the job is only 50% complete. In B's second year as an S corporation, the contract is completed. There will not be any difference in income recognition between regular tax and AMT related to this contract--this will not hurt the taxpayer. There is an AMT depreciation adjustment related to the assets owned prior to the S election (generally, taxpayer-unfavorable).
Example 6: The facts are the same as in Example 5, except that B has average gross revenue of $10 million. The contract would not be exempt under Sec. 55(e)(2)(C) and assets already in service would not be exempt under Sec. 55(e)(2)(A).
Example 7: P owns all the stock of a C corporation that owns and operates an aircraft. The aircraft cost $15 million and has been depreciated down to $10 million for regular tax purposes and $12 million for AMT purposes. P has a $500,000 basis in his stock at the time of the S election. Over the remaining depreciable life of the aircraft, P will report $2 million more in depreciation for AMT purposes than he will for regular tax purposes. This can be helpful if P has been paying AMT. However, he may run out of AMT stock basis for purposes of nontaxable distributions, while still having basis for regular tax purposes.
What is the AMT'S effect on built-in gains (BIGs)? Assume that P's corporation obtains an appraisal at the time of the S election that values the aircraft at $11 million. For regular tax purposes, he will have a potential BIG of $1 million; for AMT purposes, he has no BIG, but a built-in $1 million loss. If he were to sell the aircraft immediately for FMV, he would report and pay BIG tax on the full $1 million. Is there an AMT BIG computation that would change the amount of BIG tax paid? Under the rationale of Allen, (15) it would appear that there is no AMT version of BIGs. If so, P would have, for regular tax and AMT purposes, a taxable gain of $650,000 ($1 million BIG--$350,000 BIG tax) to report. For AMT purposes, he will have an additional $1 million in AMT basis, which will lower AMT income/gain or increase AMT deduction/loss.
There are, of course, other situations in which a C corporation making an S election will have reporting differences for regular tax and AMT purposes.
Example 8: S's C corporation runs a maritime operation. The corporation has a capital construction fired (CCF) under Sec. 7518, into which it has made a deposit of $10 million. The deposits are deductible for regular tax purposes and nondeductible for AMT. (16) S makes an S election and, in the first year as an S corporation, uses all of the money in the CCF to purchase a new vessel. The vessel will have a zero basis for regular tax purposes and $10 million for AMT purposes. S will benefit from $10 million of additional depreciation deductions for AMT purposes which, while lowering her AMT exposure, will also lower her AMT stock basis.
S corporations with accumulated earnings and profits (AEP) from years in which they were a C corporation, or with AEP acquired through a merger with a C or S corporation having AEP, must pay extra attention to distributions. If an S corporation makes distributions in excess of its accumulated adjustments account (AAA), they may be taxable. Generally, the AAA is the amount of income, net of losses and distributions, since electing S status. (17) If an S corporation has AEP, distributions in excess of the AAA are deemed to come from AEP, to the extent of AER Distributions in excess of AAA and AEP are treated as a return of basis under Sec. 301. Distributions in excess of basis are taxed as capital gain under Sec. 301(c).
Because the AAA is increased by income and deductions, income and deductions recognized at differing times under the AMT system will produce a different AAA balance, if there is such a thing as AMT AAA. Under Kegs. Sec. 1.55-1(a), the rules for regular tax apply for AMT purposes, unless stated otherwise. Sec. 1368(e)(1)(A) states that the AAA is "an account of the S corporation" which is "adjusted in a manner similar" to Sec. 1367. Sec. 1367 describes basis adjustments for S shareholders. Because basis is determined separately for regular tax and AMT purposes, as dictated by Sec. 59(h), it seems logical that a corporate-level AMT AAA exists.
The existence of a corporate-level AMT AAA has a significant effect on S corporations with AEP and their tax preparers. Sec. 1366 requires separate reporting of any item that would, if separately reported, change tax liability. Distributions from AEP must be reported on Form 1099-DIV, Dividends and Distributions. (18) How does a tax practitioner report, to the IRS or the shareholder, a different taxable amount for purposes of AMT?
Example 9: Corporation D, with AEP of $40,000, elects S status and reports income, in the first year, of $100,000 for regular tax purposes and AMT adjustments of $20,000 that increase reported AMT income to $120,000. If a $110,000 distribution is made, a $10,000 distribution of AEP has clearly occurred for regular tax purposes and should be reported on both Forms 1120S and 1099-DIV. In the absence of guidance to the contrary, it would appear that the $10,000 difference could be reported on line 15f, Other AMT items, of Schedule K, with an attached statement. The differing amounts could be further noted on line 16d, Property distributions. (19)
The differing amounts of income recognized as AEP will affect the amount of the distribution deemed to be other than a dividend. The differing amounts of property distributions have, in turn, a direct effect on the differing basis amounts for regular tax and AMT purposes.
Example 10: The facts are the same as in Example 6 in Part I of this article, except that J's corporation has $40,000 AEP from a merger with a C corporation and AAA at the end of year one is zero. For regular tax purposes, the $100,000 distribution at the end of year two would have been taxable as an AEP distribution to the extent of AEP ($40,000) and the $60,000 balance would have been a nontaxable return of capital, reducing stock basis. For AMT purposes, the taxation would remain unchanged, and the $100,000 distribution would be out of currently taxed income. At the end of year two, J's regular tax basis will be $25,000 ($85,000 starting balance--$60,000 return of capital). The following year, J's regular tax basis would go to $125,000, as he increased his stock basis $200,000 for income from the completed contract and decreased his basis for the $100,000 distribution made in the following year. His AMT basis will increase $100,000 for income recognized under the percentage-of-completion method and decrease by the $100,000 distributed, for a $90,000 ending basis.
Distributions of appreciated property cause gain recognition under Sec. 311(b). If the property has a different basis for regular tax and AMT purposes, the gain will vary, causing stock basis to differ. If the FMV lies between the two adjusted basis numbers, gain will be recognized, but not loss. Any loss would be nondeductible under Sec. 311(a). The unrecognized loss would flow through to the shareholder and reduce basis. For example, a corporation owns depreciable property with a $50,000 adjusted basis for regular tax purposes and $70,000 adjusted basis for AMT purposes. If the property is distributed when its FMV is $65,000, the corporation will recognize $15,000 gain for regular tax purposes, but will have a $5,000 nondeductible loss for AMT purposes. The gain recognized for regular tax purposes will increase regular tax basis, while the loss will not be recognized for AMT purposes, but will reduce AMT basis.
When deduction or loss items are limited due to lack of basis, the disallowance is allocated among the various separately stated items, under Regs. Sec. 1.1366-2(a)(4).When basis differs between regular tax and AMT, the items disallowed will differ and may be allowed at different rates, or carried forward at different rates.
Example 11: G's S corporation had a bad year, incurring a total loss of $90,000, consisting of an ordinary loss from operations of $66,000, a passive activity loss (PAL) of $12,000, a capital loss of $9,000 and foreign tax paid of $3,000. Before taking these items into account, G has $30,000 basis for regular tax purposes and $60,000 for AMT purposes. G does not get to pick and choose which items to use first. G will be able to use, for regular tax purposes, $22,000 ordinary loss, $4,000 PAL (subject to the Sec. 469 passive loss limits), $3,000 capital loss (subject to the capital loss limits) and $1,000 foreign tax expense (subject to the normal limits). For AMT purposes, G will be able to use $44,000 ordinary loss, $8,000 PAL (subject to the Sec. 469 passive loss limits), $2,000 capital loss (subject to the capital loss limits) and $2,000 foreign tax expense (subject to the normal limits).
The excess losses passed through that are disallowed due to lack of basis for regular tax and AMT, will need to be tracked and carried over to be used in future years if basis increases. If G had done some planning to increase basis during the year, it would not be necessary to track these items. Also, Regs. Sec. 1.1366-2(a)(5) provides that, if G transfers part of his stock, his carryover of disallowed deductions is not reduced. He would retain the carryovers; they do not transfer to the donee. The real tax trap springs when all of the stock is sold or gibed. If G transfers his stock while any losses or deductions are suspended due to lack of basis, the carryovers disappear, even if G sells his stock at a gain.
There is only one instance in which carryovers are permitted to transfer from one individual to another--in the case of divorce. Under Sec. 1366(d)(2)(B), when stock with losses suspended due to lack of basis is transferred in a divorce, the suspended losses are also transferred to the spouse. The losses can be used by the transferee--spouse as basis is increased. If the suspended losses differ under the regular tax and AMT rules, the differing amounts would transfer to the former spouse.
Regs. Sec. 1.199-9(c), which applies to years beginning before May 18, 2006, indicates that the domestic production activities deduction (DPAD) allowed by Sec. 199 has no effect on basis. However, it also states that basis does affect the DPAD. Specifically, Regs. Sec. 1.199-9(c)(2) indicates that, if a loss containing domestic production expenditures is passed through to an S shareholder and that shareholder does not have sufficient basis to claim the entire loss, the proportion of loss disallowed due to lack of basis is also the amount of domestic production expenditures disallowed. Just as the disallowed loss carries forward to future years, the disallowed domestic production expenditure is also carried forward to future years. To the extent that the previously disallowed loss is later deductible due to increased basis, the previously disregarded domestic production expenditure is taken into account in computing the DPAD for the year the loss is allowed. This same regime applies to the extent a loss is not allowed under the Sec. 465 at-risk rules and the Sec. 469 PAL rules. Prop. Regs. Sec. 1.199-5, dealing with tax years beginning after May 17, 2006, contains the same provisions.
A cursory reading of Sec. 199 may lead one to believe that the DPAD is computed in the same manner for both regular tax and AMT purposes. A doser reading reveals that, under Sec. 199(d)(6)(A), "qualified production activities income shall be determined without regard to any adjustments under sections 56 through 59." Adjustments under Secs. 56-59 may lead to basis differences; the regulation does not state that these adjustments would not affect basis.
Applying Allen, one would ignore the adjustments of Sec. 56-59 only for purposes of computing qualified production activities income. Extending that meaning to include disregarding the effect of these adjustments on basis may lie beyond Allen's authority. Congress or the IRS could change this by regulation, but neither has yet done so. The instructions for 2006 Form 8903, Domestic Production Activities Deduction, indicate the deduction is the same for both regular tax and AMT purposes. However, the instructions also reiterate the loss-disallowance rule, without reconciling the possible conflict between the statement that the deduction is the same for both purposes and the potential difference in basis for regular tax and AMT purposes. Due to such basis differences, the DPAD may differ between regular tax and AMT.
Example 12: H's S corporation operates a construction company whose work qualifies for the DPAD. In year one, H has a $100,000 loss on the cash basis, solely attributable to construction (i.e., Sec. 199) activities. His regular tax basis is $60,000 and his AMT basis is $100,000. For regular tax purposes, H can deduct a $60,000 loss. He will also take $60,000 into account in computing his DPAD. The $40,000 loss suspended due to lack of basis and an equal amount of domestic production expenditures will carry forward to the next year. For AMT purposes, H can claim the entire $100,000 loss and would claim it for purposes of the DPAD. However, H has no other domestic production activity income at the individual level and, thus, cannot take a Sec. 199 deduction for either regular tax or AMT purposes.
In year two (2006), H has $300,000 qualifying domestic production income and $260,000 additional expense. He has no other income or expense flowing from his S corporation. For regular tax purposes, he will report the $40,000 net profit from year two, which is then reduced by the $40,000 loss carryforward from the prior year, for a taxable amount of zero. Although he also carries forward the $40,000 of domestic production expenditures, H has no DPAD, as his income is zero. For AMT purposes, he will report the $40,000 profit, reduced by a 3% DPAD, absent any wage limits.
Lack of basis can reduce future domestic production expenditures. Because these costs reduce qualified domestic production income and the Sec. 199 percentage is increasing, lack of basis can result in expenditures that would otherwise cost 3% turning into expenditures that cost 6% or 9%.
State Tax Differences
Finally (and very significantly), state tax implications can cause basis differences from Federal tax rules. States that have differing rules for depreciation are a common example. A state, like the Federal government, may have differing rules for its regular tax and AMT. In these situations, a practitioner will need to maintain appropriate basis schedules for each state with rules varying from the Federal tax system. This could mean four or more basis schedules related to one Schedule K-1.
Practitioners should be aware of the need to keep AMT basis schedules in addition to regular-tax basis schedules. Only by reference to these schedules Hill they be able to apply accurately the proper rules on loss limits and taxation of distributions to both the regular tax and AMT systems. The nature and complexity of the calculations make computer preparation of these schedules a necessity.
Many commercial tax preparation packages produce regular-tax basis schedules. Unfortunately, there does not appear to be any commercial tax software that produces AMT basis schedules as part of either the corporate or individual tax return preparation process. It is unknown whether this lack of commercial software assistance affects tax advisers trying to apply properly the differing AMT rules to their clients. Advisers trying to apply these rules for their clients, and who are unable to adapt their present software to produce AMT basis schedules, could consider preparing AMT basis schedules using the Excel-format basis schedule prepared by the AICPA S Corporation TRP. (20)
This article illustrates why basis-schedule preparation and maintenance for both the regular tax and AMT systems can be complicated and time-consuming. This complexity and cost should lead tax advisers to revisit the language of their engagement letters. Basis schedules are needed to determine the proper taxation of the individual S shareholder, but are most easily prepared as part of the preparation of the corporate tax return. Practitioners should have a dear understanding with their clients, documented in their engagement letters, of whether the basis schedules will be prepared and billed (perhaps as a separate line item) as part of the corporate return.
In a number of situations, a significant difference can occur between the income or losses flowing from an S corporation that are reportable for regular tax purposes versus AMT. As more and more taxpayers are subjected to AMT and more and more taxpayers use S corporations, the number of taxpayers actually affected by these differences will grow.
Making practitioners aware of some of these differences Hill enable them to help clients plan more effectively and also reduce the likelihood of encountering an unpleasant surprise when preparing returns. If tax advisers are not preparing AMT basis schedules for clients, they may want to consider them. Well-maintained basis schedules will help identify clients with significant basis differences between regular tax and AMT. These will be the clients most affected by the application of the loss limits and distribution taxation.
Editor's note: Mr. Walsh is a member of the AICPA Tax Division's S Corporation Technical Resource Panel (TRP).
Author's note: The author would like to thank the S Corporation TRP and particularly, Prof. Ken Orbach, for their assistance with this article
(12) See Regs. Sec. 1.1366-2(a)(6) and Secs. 59(h) and 1015 for a discussion of the basis of property acquired by gift.
(13) See Kegs. Sec. 1.1015-1(a)(2).
(14) See Secs. 422 and 56(b)(3); see also Robert J. Merlo, 126 TC 205 (2006).
(15) Charles C. Allen III, 118 TC 1 (2000).
(16) See Sec. 56(c)(2).
(17) See Sec. 1368(e).
(18) See the instructions for 2006 Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K, Shareholders' Pro Rata Share Items, line 17c, Dividend distributions paid from accumulated earnings and profits.
(19) See the instructions for 2006 Form 1120S, Schedule K.
(20) This schedule is available to AICPA Tax Section members via the AICPA website, at http://tax.aicpa.org/Resources/S+Corporations/Tools+and+Aids/. As this article went to press, Creative Solutions Ultra Tax was released, containing input areas for AMT basis schedules for partnerships and S corporations. For more information, visit www.creativesolutions.thomson.com.
Kevin J. Walsh, CPA, CPV
Walsh, Kelliher & Sharp, CPAs, APC
Exhibit: Basis for Example 1 Regular AMT tax basis adjustments AMT basis Beginning stock basis $90,000 $95,000 Add income hems: Nonseparately stated income -0- $15,000 15,000 Sec. 1231 gain 4,000 (4,000) -0- Subtotal $94,000 $110,000 Distribution of $100,000 (94,000) (100,000) Subtotal -0- $10,000 Subtract deduction and loss items: Nonseparately stated loss (25,000) 25,000 -0- Sec. 1231 loss (11,000) (11,000) Subtotal ($25,000) ($1,000) Losses suspended due to lack of basis $25,000 $1,000 End-of-year basis -0- -0- Note: The AMT adjustment related to the $40,000 depreciation changes the nonseparately stated $25,000 loss to a $15,000 profit (shown as nonseparately stated income). The AMT adjustment related to the $15,000 adjusted loss changes the separately stated $4,000 gain to an $11,000 loss, shown as a separately stated loss. The distribution in excess of basis is reported as $6,000 capital gain for regular tax purposes. A $6,000 adjustment must be made to AMTI to remove the capital gain arising from the distribution in excess of basis.
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|Title Annotation:||S Corporations|
|Author:||Walsh, Kevin J.|
|Publication:||The Tax Adviser|
|Date:||Feb 1, 2007|
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