Bozo Tax Tip #1: We Don’t Need No Stinkin’ Basis

If there’s one issue in tax that tax professionals have trouble explaining to clients it’s basis. Your basis in an entity is, generally, the total of your investment in an entity plus income it generated less any distributions from it. If you’re an investor in a business, you can only take losses up to the amount of your basis. Sounds simple, right?

So let’s say you invest in an S-Corp, “Losing Money, Inc.” Unfortunately, it’s name matches what’s happened year after year. You invested $10,000 years ago, and each year your share of the loss has been $3,000. It’s year four of your ownership, and you get the K-1 showing the (as usual) $3,000 loss. Your tax professional tells you, “I’m sorry, but you’re only getting $1,000 of the $3,000 loss–you used up your basis.”

The IRS has been battling this issue for a number of years. Owners of businesses are supposed to keep basis statements. Most reputable tax professionals prepare basis statements for the partnerships and S-Corporations that they prepare returns for. It remains, though, the responsibility of the owner to keep track of the basis.

Anyway, the IRS has (in audits) seen many owners not have basis and still take losses. The IRS hasn’t had a good method to police this. This year, though, the IRS wised up. There’s an addition to the instructions for page 2 of Schedule E:

If you are claiming a deduction for your share of an aggregate loss, check the box on the appropriate line in Part II, column (e), and attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. For details, see the Shareholder’s Instructions for Schedule K-1 (Form 1120S). [emphasis added]

Of course, some individuals may attach a phony basis statement to get around this issue, but that’s yet another bozo action (that’s committing a felony–lying on your tax return, which is signed under penalty of perjury). Still, it’s likely that the IRS has the right idea and this will lessen the problem. (I expect the IRS to expand basis reporting rules to partnerships in the near future.)

Of course, some individuals may simply ignore attaching the basis statement and play ‘audit roulette.’ That’s something else I can never advise. But if you want to enjoy the Bozo side of life, just keep ignoring your basis and take your loss year after year after year.


That’s the last of our Bozo Tax Tips for the 2019 tax filing season. We’ll be back with normal content, including a rather scathing review of this tax filing season, late next week.

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