Determining Basis for Partners and Shareholders: AAA vs. Capital Accounts, Debt-Financed Losses, Loans and Guarantees

This course will explain basis calculations for S corporations and partnerships. Our panel of tax professionals will compare and contrast debt-financed losses, AAA (accumulated adjustment account) and capital accounts, and basis restoration. The panel will provide examples of these complex calculations for tax practitioners working with flow-through entities.

Basis in a flow-through business is key to deducting losses and calculating gains or losses on disposition. Certain losses deductible by partners in partnerships are not deductible by S corporation shareholders. Entity-level debt and personal guarantees are treated differently for these otherwise similar entities.

Shareholders track their basis using accumulated adjustment accounts, while partners use capital accounts. Both are increased by flow-through income and contributions of cash or property and reduced by distributions and deductions. Similarly, both owners are also subject to at-risk rules before loss deductions are allowed.

Planning techniques are available to increase basis in these flow-through entities to deduct current year losses. Ordering rules for loss deductions and restoration of basis are complex. Tax practitioners need to understand the similarities and differences in basis calculations for owners of both partnerships and S corporations to report annual flow-through income and deductions and ultimately the gain or loss on the disposition of these entities.

Listen as our panel of flow-through tax experts discusses how basis is calculated for partnerships and S corporations, planning techniques to increase basis and deductions for losses when and if they occur, and recent cases challenging basis calculations for flow-through entities.