Page 211 - TaxAdviser_2022

Distributing beginning stock
basis or AAA balance free L’s stock basis in Example 2
of tax
Basis, beginning of year $10,000
Distributions received by a shareholder
Capital gain 2,000
during the year will be tax-free at least to
Basis, before distributions and losses 12,000
the extent of the lesser of: Distribution (to extent AAA is reduced by distributions —
■ The shareholder’s stock basis at the
see preceding AAA calculation) (2,500)
beginning of the tax year, or Basis, before loss and deduction items 9,500
■ The corporation’s AAA balance at the
Nonseparately stated loss (9,200)
beginning of the year.
Basis, end of year $ 300
All or a portion of distributions
in excess of the beginning stock basis
or AAA balance may be tax-free, too,
because basis is increased for the current T’s AAA and AE&P in Example 3
year’s income before it is reduced for
AAA AE&P
distributions. Also, the beginning balance
Balances, beginning of year $3,000 $5,250
of AAA is increased by the excess, if any,
Income — —
of aggregate income and gain items over
Balances, before distributions and net negative
aggregate loss and deduction items be-
adjustment 3,000 5,250
fore being decreased by distributions.
Distributions (3,000) (3,500)
Balances, before net negative adjustment 0 1,750
Example 3. Making nontaxable
Net negative adjustment (excess of aggregate loss
distributions to the extent of the lesser
and deduction items over income and gain items) (8,100) —
of beginning AAA or stock basis: E
Balances, end of year $(8,100) $1,750
is the sole shareholder of T Inc.,
a calendar-year S corporation. T
has AAA of $3,000 and AE&P
of $5,250 on Jan. 1 of the current E’s stock basis in Example 3
year. E’s stock basis on that date is
$9,500. He has no debt basis. Dur- Basis, beginning of year $9,500
ing the year, T distributed $6,500 Income —
to E. The only passthrough item Basis, before distributions and losses 9,500
on his Schedule K-1 is an ordinary Distributions (to extent AAA is reduced by distributions —
loss from operations of $8,100. The see preceding AAA calculation) (3,000)
corporation’s AAA and AE&P Basis, before loss and deduction items 6,500
are determined as shown in the Nonseparately stated loss (to extent of basis) (6,500)
table “T’s AAA and AE&P in Basis, end of year $0
Example 3.”

E’s stock basis is determined as
shown in the table “E’s Stock Basis in E has sufficient basis to deduct business will be a major factor when
Example 3.” $6,500 of the loss in the current year. considering whether the distributions
The $6,500 distribution is nontaxable The $1,600 ($8,100 − $6,500) remain- should be made. ■
to the extent it reduced AAA ($3,000) ing loss carries over to the follow-
and is a taxable dividend to the extent it ing year.
reduced AE&P ($3,500). Note that the In a year when a loss is anticipated, Contributor
nontaxable portion is the lesser of the be- shareholders may want to receive a
John Baer, CPA, is a specialist editor
ginning balance of AAA ($3,000) or E’s distribution in the amount of the with Thomson Reuters Checkpoint.
stock basis at the beginning of the year beginning stock basis or AAA bal- For more information about this col-
($9,500), even though the corporation ance. The availability of funds that are umn, contact thetaxadviser@aicpa.org.
showed an operating loss for the year. not required in the operation of the

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