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Basis Planning Following the Death of an S Corporation Shareholder

Nebraska CPA
November/December 2019

Decedent’s estates frequently include interests in closely held businesses taxed as partnerships or S corporations. As a general matter, any assets included in a decedent’s estate for federal estate tax purposes will be subject to a basis adjustment under §1014. The §1014 basis adjustment applies to the partnership interests and S corporation stock owned by a decedent ("outside basis"), but not to the assets owned by the partnership or S corporation ("inside basis"). 

Subchapter K of the Code provides entities taxed as partnerships with a statutory
mechanism under §754 and §743 to adjust the inside basis in partnership assets when a partner’s interest is sold or when a partner dies. Unfortunately, for S corporations and their shareholders, Subchapter S does not contain a provision similar to §754 with respect to assets held by an S corporation. In certain situations, however, there may be an opportunity to obtain a tax-free basis adjustment for the assets held by an S corporation.

Learn how it's possible to replicate the same effect of §754 in the following article by Alex Wolf and Mitch Hiatt.

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