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Sunday, July 17, 2016

Finance 12 S Corporation Stock and Debt Basis

With an S Corporation, there are three shareholder loss limitation rules. Each limitation must be met, in the following order, before a shareholder is allowed to claim a flow-through loss deduction.

1. Stock and Debt Basis Limitations

2. At Risk Limitations

3. Passive Activity Loss Limitations

S Corporation Shareholders are Required to Compute Both Stock and Debt Basis EACH year, which increases or decreases based upon the S corporation's operations.

This is important for the following reasons:

In order for a shareholder to claim a flow through loss or deduction item, they need to have adequate stock and or debt basis.

In order for a shareholder to determine whether or not a non-dividend distribution is non-taxable, they need to demonstrate they have adequate stock basis. When a shareholder receives a non-dividend distribution, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis. debt basis is not considered when determining the taxability of a distribution).

As with any asset, when the stock is sold or disposed of, basis needs to be established in order to determine the proper gain or loss on the sale or disposition.

When computing stock basis, the shareholder starts with their initial capital contribution to the S Corporation or the initial cost of the stock they purchased.

A shareholder's stock basis is increased for the following items:

Ordinary business income

Separately stated income items

Tax exempt income

A shareholder's stock basis is decreased for the following items:

Ordinary business loss

Separately stated loss items

Non-deductible non-capital expenses

Non-dividend distributions

There is an ORDERING RULE that must be followed in computing stock basis as follows:

Stock Basis is adjusted annually, as of the last day of the S corporation year, in the following order:

1st-Increased for all income items

2nd-Decreased for non-dividend distributions

3rd-Decreased for non-deductible non-capital expenses

4th-Decreased for loss and deduction items.

As stated earlier, when determining the taxability of a non-dividend distribution, the shareholder looks solely to his/her stock basis (debt basis in not considered).

For loss and deduction items, which exceed a shareholder's stock basis, the shareholder is allowed to deduct the excess up to the shareholder's debt basis (which are shareholder loans personally made the the S corporation).

If a shareholder has S corporation loss and deduction items in excess of stock basis and those losses and deductions are claimed based on debt basis, the debt basis of the shareholder will be reduced by the claimed losses and deductions.

It is important to note that if an S corporation repays reduced debt basis to the shareholder, part or all of the repayment is taxable to the shareholder.

Also, for a shareholder to have debt basis, the shareholder must personally make a (real) loan of money to the corporation. A loan guarantee is not sufficient to create debt basis.

The loss and deduction items in excess of stock and debt basis:

Retain their character

Are treated as loss and deduction items in the subsequent tax year and will be allowed if the shareholder has increased and or restored stock and or debt basis

Carryover indefinitely or until all of the shareholder's stock is disposed of

Tracking stock and debt basis each year will help the shareholder plan for potential distributions and losses and deductions and ensure there are no unexpected and no unintended surprises at tax time.

This article was written by  Donald M. Scherzi, CPA, CFP, LLC 
Mike Lupo, SCORE Counselor


Monday, July 11, 2016


New SCORE Logo jpeg
     Big Ideas for Small Business Owners

The Business Event of the Year
for Small Businesses With 
BISBO -  "Big Ideas for Small Business Owners"
Saturday, Sept 10th, 8:00 AM to 4:00 PM
Lynn University, Boca Raton

Here's why you should attend:
Apple's Business Development Executive Jay Matheson will show you and teach you how to Brand like Apple.  Yes, you can do it too using his methods. 

Google's Stasia Kudrez* will show you how to get the customers you want to your website, get found on search and get Google to verify your business at the event.
Yelp's Genna Gold*, manager of local business outreach, will help you learn the tricks on how to get your customers to Rave about you online.
GoDaddy's Shawn Pfunder* will teach you fun ways to get and keep customers
Constant Contact's Pamela Starr*, director of training for all of North America, will teach you how to build relationships to build your business. You will get a free trial account and free setup help at the conference.
Exclusive Appearances by all Speakers*
(only time in Florida this year)
  • Hi-speed 3D Printer demo
  • The latest in ROBOTS that work and talk
  • DRONE Demo and how to use them in business
  • Virtual Reality in Action Demo and how to use it in your business!
  • Workshops, Roundtables With Major Speakers and Over 20 Seminars
Networking during the included Breakfast and Lunch

Hear from 3 successful local entrepreneurs who have built Multi-million dollar businesses from Scratch. Learn how they did it and get timely tips from them and participate in an Open Q & A

As a summer special early bird is 
extended to July 31st
Just $39 per ticket until July 31st 
After July 31st
1 ticket $ 59.00
2 tickets $ 99.00
Tickets at the door $69 per ticket - Credit Card Only

Refund Policy: Refunds will be given until September 1st
South Palm Beach SCORE
7999 North Federal Highway
Suite 201
Boca Raton, FL 33487


Tuesday, July 5, 2016

Florida rated #1

A Harris poll in November 2015 rated Florida #1 as the most desirable state to live in. It seems it is all about the beach and living near he water. More that 25% of those who come to Florida were born between the mid 1940’s and mid 1960’s.. aka “baby boomers”. 


What does this mean for your business?


Steve Koenig, SCORE Counselor


Friday, July 1, 2016

Finance 11 Deducting Business Entertainment & Meals

Business owners are allowed to deduct business-related entertainment and meals for entertaining  clients, customers, employees, and prospects-only if they both ordinary and necessary and meet either the directly-related test or the associated-test.

An ordinary expense is one that is common and accepted in the business owners trade or business.

A necessary expense is one that is helpful and appropriate for the business.

To meet the directly-related test, you must show that:

The main purpose of the combined business and entertain/meal was the active conduct of business.

You did engage in business with the person during the event, and

You had more than a general expectation of getting some income or some other specific business benefit at some future time.

If the entertainment/meal takes place in a clear business setting and is for your business or work, the expenses are considered directly-related to your business or work.

Even if your expenses do not meet the directly-related test, they may meet the associated-test. To meet the associated-test, you must show that the entertainment/meal expense is:

Associated the active conduct of your trade or business, (you can show that you had a clear business purpose for having the expense) and

Directly before or after a substantial business discussion (you actively engaged in the discussion, meeting, negotiation, or other business transaction).

50% Limit

The tax law allows you to deduct only 50% of your business-related entertainment/meals you have while:

Traveling away form your tax home whether eating alone or with others on business.

Entertaining at your place of business, a restaurant, or other location, or

Attending a business convention or reception, meeting, or luncheon.

The amount of the expense must be considered reasonable. Included in the 50% limit are taxes and tips, cover charges, rent paid for a room in which you hold an event, and parking. Amounts considered lavish or extravagant are not deductible.

Entertainment Expenses Are NOT Deductible

You cannot deduct club dues and membership fees paid to:

Airline Clubs
Athletic Clubs
Country Clubs
Golf Clubs
Hotel Clubs

Expenses for Spouses

You cannot deduct entertainment/meal expenses for your spouse or for the spouse of the person you are entertaining unless you can show you had a clear business purpose, rather than a personal or social purpose, for incurring the expense.

Required Documentation and Substantiation In An Audit

The tax laws requires the following written documentation and substantiation of all entertainment and meal expenses included on a tax return:

Date expense was incurred
Location of event
Total Amount
Business Purpose, and
Business Relationship

Failing to keep appropriate records could allow the IRS to disallow all or a portion of the expense in an audit.

This article was written by  Donald M. Scherzi, CPA, CFP, LLC 

Mike Lupo, SCORE Counselor