August 27mgmt127b

# August 27mgmt127b - \$60 of Shareholder MGMT 127B income...

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Shareholder 10% \$60 of income Shareholder 10% \$(60) of income Shareholder 10% \$(600) of income August 27, 2008 MGMT 127B S-Corporations Continued Basis in stock = Contribution + % Income – Received Distribution Review: If the company has \$60 of earnings, and you own 10% of the company, it is as if you earned \$6 of income. You are required to pay taxes on this amount regardless of whether the cash is paid out or not.

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When income is earned, raise your basis by the amount earned. When there is a loss, reduce your basis by that amount. After earning \$6 of income, the basis in the stockholders shares will be \$16. When a distribution of \$6 is received, the basis will fall back to \$10. The shareholder classifies the income the same way the company has classified it. What if the \$60 of income came solely from municipal bond interest? Although there would be no income reported on your tax return, you must still increase your basis so that when distributions are received, they will be tax-free. ALL INCOME increases basis in the stock—even interest earned on a tax-free municipal bond. Example The company has income totaling \$60 \$30 is ordinary \$20 is capital gain \$10 is municipal bond interest Therefore your income is \$6, broken down as follows: \$3 of ordinary \$2 of capital gain \$1 of municipal bond interest Basis in the stock is adjusted upward by \$6 even though the tax return will only show \$5 of income.
If your initial contribution was \$10, you end up with a basis of \$16. In S-Corps, flows are if you as an individual earned the income. If you had a capital gain

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## This note was uploaded on 10/02/2008 for the course MGMT 127B taught by Professor Klein during the Summer '08 term at UCLA.

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August 27mgmt127b - \$60 of Shareholder MGMT 127B income...

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