S Corp: Formation

Question 1

What is the correct order of operations in calculating basis?

Answer 1

1. • Income items (including gains)
2. • Distributions
3. • Nondeductibles
4. • Loss items/ deductions (allocate pro rata if there is not sufficient basis to absorb these items)

Question 2

Does muni bond interest increase basis?

Answer 2

Yes. Although muni bond interest is nontaxable, it still increases basis

Question 3

Are distributions received taxable?

Answer 3

No. Although distributions received will reduce your basis, it is still nontaxable (it was taxed already when it was earned and showed up on line 1 of your K-1)