qbteachmt
Level 15

"please help me understand the basis vs equity difference. their books are kept as tax books. before the transfer, Father's basis was initial Capital Stock of $100 plus all net profits (or losses) from the date of incorporation, plus Additional Paid-In Capital, less non-deductible items (charity, section 179, life insurance premiums, 50% meals etc), less distributions. so at any given moment i could say Father's basis is equal to Total Equity on S-Corp Balance Sheet. is that correct?"

Nothing changed for the Corporation. You are confusing the number of shareholders and their proportional split, with the Corporation's financial perspective. You only changed Number of Shareholders and now there is a Split for purposes of the K-1. Let's try this example, Olga:

If I own 5 shares of Ford Stock, the Ford bookkeeping doesn't reflect my personal ownership, because it doesn't affect Ford Corp's financial position. If I decide to sell those 5 shares to you, or only 3 of them, nothing changed for Ford's financial perspective and they do not put this into their financial records. That's why nothing about that $10, or basis or equity, has changed for the corporate books.

Olga asked: "what should they have done differently?"

Ownership has changed, for purposes of the tax reporting to the Shareholders, on the K-1, and one shareholder just Sold some of their shares. But unfortunately, by gifting 49%, the father bypassed what could have been a Step Up in basis. If the father had put the shares into a will or trust as transferring to the son on death, the Son would get that basis as of the date of Death. See how that is a better financial transaction for both parties?




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