Discussion:S Corporation stock basis

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> S Corporation stock basis

Silas (talk|edits) said:

24 November 2005
An S Corp pays Per Diem to its truck drivers. The deduction is limited for 2005. The S Corporation's net income is increased by the nondeductible Per Diem Allowances.

Is the stockholders' stock basis increased by the S corporation's nondeductible Per Diem expense? My guess is that the nondeductible Per Diem does not increase the stock basis because capital is not increased nor is the nondeductible Per Diem a deferred expense.

Jamesn (talk|edits) said:

26 November 2005
Yes, the stock basis is increased.

As other M-1 adjustments - "Expenses on Books - Not on Return" - the effect is that the Taxable Income is increased. (Same for Penalties, fines, etc.)

Silas (talk|edits) said:

28 November 2005
Thanks for your reply. Of course when the S corp's Ordinary Business Income is increased by

the nondeductible Per Diem expense the stockholders report this item as part of the Corporation's distributable income for the year. Hence, if the shareholder does not receive a distribution his stock basis should be increased except as provided by Section 1367 of the Code.

As I understand the statute Treas. Reg. 1.1367-1(c) would not capitalize the nondeductible Per Diem disallowed under Section 274. How, then, could the nondeductible and nondeferred and noncapitalized per diem expense become a part of the stockholders' basis?

Jamesn (talk|edits) said:

29 November 2005
I am not sure if I am understanding your originial question.

Excess Payments for Travel, Meals, Entertainment etc should be handled in the following manner:

"...Allowance more than the federal rate. If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items.

 Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Deduct it as travel expenses (as explained above). This part of the allowance is treated as reimbursed under an accountable plan. 
 Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. This part of the allowance is treated as reimbursed under a nonaccountable plan..."

Silas (talk|edits) said:

29 November 2005
Yes, there is a limitation on deduction for per diem paid to truckers by their employer. The limitation for 2005 is 70%. [The question is not whether the truckers should report the per diem.

The excess payment over the allowable percentage of per diem is obviously not deductible, not deferred and not capitalized. Section 1367(a)(2) identifies certain nondeductible expenses that do not increase basis of stock and are not chargeable to Capital. Treas. Reg 1.1367-1(c)(2)provides examples of non-deductible and noncapital expenses. Item 5 of these regs specifically identifies meals and entertainment expenses disallowed under Section 274.

I have always thought that if the shareholder reports his distributable share of 1120S income that this amount increases his basis to the extend that it is not distributed. However, some expenses such as the nondeductible per diem, penalties, etc. do not increase basis.

Thanks again for your consideration of my question.

To join in on this discussion, you must first log in.
Personal tools