S Corporation Basis, Distributions, and QBI for a Consulting Shareholder
Maya Chen, single, owns 100% of Chen Analytics Inc., an S corporation that provides data consulting-a specified service trade or business. For 2024, Chen Analytics reports ordinary business income of $180,000 and pays Maya W-2 wages of $60,000. Maya’s stock basis on January 1 was $12,000, and she had a documented shareholder loan with a $30,000 basis. During 2024 the corporation distributed $90,000 to Maya and repaid $10,000 of the loan principal. Maya also reports $40,000 of long-term capital gain and $8,000 of taxable interest. She has no other income or deductions and claims the 2024 single standard deduction of $14,600. Maya’s taxable income before any qualified business income deduction is $213,400. She asks how the distribution affects her basis and how much QBI deduction she can claim.
1. Determine Maya’s ending stock basis and loan basis and explain how the $90,000 distribution is taxed.
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Stock basis. Maya’s stock basis is adjusted in this order:
- Beginning stock basis: $12,000
- Plus ordinary business income: $180,000
- Minus distribution: $90,000
- Ending stock basis: $102,000
The $90,000 distribution is a nontaxable return of basis because it does not exceed the $102,000 stock basis. It reduces stock basis but does not create gain.
Loan basis. The shareholder loan is a separate asset. The $10,000 principal repayment reduces Maya’s basis in the loan from $30,000 to $20,000. The repayment is not a distribution and does not reduce stock basis. Maya cannot use loan basis to support a distribution from the corporation.
2. Compute Maya’s 2024 QBI deduction, showing the SSTB phase-in and wage limitation.
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Maya’s QBI is the $180,000 ordinary business income. The capital gain and interest are not QBI. Because Chen Analytics is an SSTB and Maya’s taxable income exceeds the 2024 single threshold of $191,950, the SSTB phase-in applies.
- Excess over threshold: $213,400 − $191,950 = $21,450.
- Applicable percentage: $21,450 ÷ $50,000 = 42.9%.
- Reduced QBI: $180,000 × (1 − 0.429) = $102,780.
- Reduced W-2 wages: $60,000 × (1 − 0.429) = $34,260.
- Tentative 20% QBI amount: $102,780 × 20% = $20,556.
- Wage limitation: greater of 50% of $34,260 = $17,130, or 25% of wages plus 2.5% of UBIA = $8,565. The limitation is $17,130.
- Tentative deduction: lesser of $20,556 and $17,130 = $17,130.
- Taxable income limitation: 20% × ($213,400 − $40,000 net capital gain) = $34,680. This does not reduce the $17,130.
Maya’s 2024 QBI deduction is $17,130.
3. Assume instead that Chen Analytics distributed $200,000. What gain, if any, does Maya recognize, and what is her ending stock basis?
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Stock basis before the distribution is $12,000 + $180,000 = $192,000. A $200,000 distribution exceeds that basis by $8,000.
- Nontaxable return of basis: $192,000
- Excess distribution: $200,000 − $192,000 = $8,000
- Character: capital gain, because the distribution exceeds stock basis
- Ending stock basis: $0
The $8,000 excess cannot be offset by Maya’s $20,000 loan basis. Loan basis is relevant only to losses or to the loan itself, not to corporate distributions. The $10,000 loan repayment still reduces loan basis separately.