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S Corp Distributions in excess of basis and Loan repayments in reduced basis loans

I have spent countless hours looking for the answer to what should be simple...I have an S-Corp with losses carried forward, Stock basis is zero, loan basis is zero..I need to report distributions (in excess of basis) and loan repayments (on reduced basis loans) I know that it is income BUT WHERE DO I REPORT IT????? I have searched business and personal versions of turbo tax, irs code 1367, publication 925...every resource seems to tell me to report these items as income but I am lost.

I am Totally Taxed Out

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Distributions in Excess of Basis Capital Gains

Report S Corp distributions in excess of basis as capital gains on Schedule D. If you've owned the S shares over 1 year, it will be a long term gain.

Enter the distribution as the sales price and zero as the basis.

L:)

Excess Distributions

I have an IRS audit on this issue and have raised the issue of the gain being long term. Do you have any authority to show it is long term? The Code and Regs just said capital gains.

Long or Short Term Gain

Hi Ken,

Yes, the distribution in excess of basis is a capital gain. In fact this is from IRS Pub 550, Investment Income and Expenses:

Generally, S corporation distributions, except dividend distributions, are considered a return of capital and reduce your basis in the stock of the corporation. The part of any distribution that is more than your basis is treated as a gain from the sale or exchange of property.

So you need to determine the holding period of the property to determine it's a short- or long-term capital gain.

According to IRC section 1222(1):

The term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.

If you have held the shares more than one year, then it should be a long-term gain. If not, then it should be short-term. What code section is the auditor using to support their finding that the gain is short-term?

Hope this helps.
L:)

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