Debt Basis and Shareholder Loan Repayment

[TampaBayCPA]

Hi All,

Trying to wrap my head around recalculating shareholder basis. Currently have a client that has a gain on repayment of a shareholder loan, and trying to understand what I am missing when I am reconciling their basis with the balance sheet. Here is the scenario:

Cap Stock: 7,000

APIC: 2,755

RE: (135,631)

Loan From SH: 127,928

This leads me to believe they should have 2,052 in debt basis at YE. Lacerte is calculating 3,422, since they had a loan repayment of 1,455 for the year, but only 85 was basis of loans repaid, and 1,370 was considered gain on repayment. Does the gain on repayment add to the debt basis? What am I missing?

[PhoebeRoberts]

Outside stock basis is not necessarily identical to the sum of the equity accounts. You don't reconcile outside basis to the balance sheet. 

Time to set up an Excel reconciliation and go back to a known starting point, then work forward from there. I put a note in my corporate workpapers that lets me know when and why the equity / outside basis difference arose, and the amount of it, because otherwise I'll have to do that same reconciliation in some future year.

[TampaBayCPA]

Thank you for the quick reply. Understood that there are differences in outside/inside, to be honest just was not sure of the treatment here for the gain/repayment.

So does the gain on repayment not come into play when computing debt basis? Only the portion (85) that Lacerte calculated would reduce debt basis and there will be a permanent difference between the balance sheet and outside basis for the 1,370 gain?

[qbteachmt]

Are you asking about Interest Paid by the S Corp, and Earned by the lending shareholder?

[PhoebeRoberts]

The 7203 instructions (and the form itself) have a really good explanation of how to calculate debt basis.

https://www.irs.gov/pub/irs-dft/i7203--dft.pdf

[joshuabarksatlcs]

My wild guess is that it had to do with the debt basis in you input.

Assuming:

1.  NO difference between the AAA and the equity account info; and

2.  The debt balance was AFTER the repayment of $1,455;

the ending debt basis should be $2,052. 

Your problem could be in the input in Lacerte of the beginning or ending debt basis or both.  It could also be that in the interim years, there was zero debt basis at one point.  When the debt was repaid, the zero basis triggered the gain.  With the gain, the basis (deduction below zero basis) was restored.  Somewhere along that line.  But then, without seeing the details, I could just be barking up the wrong tree.

I would start by checking the debt basis info.  Hope this helps.