What is the importance of my S Corporation stock basis and how is my basis in the S Corporation stock calculated? These may be two common questions for owners of small businesses or closely held corporations, and rightfully so. In previous articles we have discussed below, as well as computing the stock basis. This article has been prepared by a Denver tax attorney to provide information related to the above issues, but you should always consult directly with your tax attorney and/or tax professional regarding your tax questions and issues. If you need to speak with a tax attorney in Denver, you can contact The McGuire Law Firm to schedule a free consultation.
First, we should discuss the importance of stock basis in S corporation stock. First, if an S corporation shareholder wishes to claim a loss, the shareholder must have the necessary basis in their stock to take the loss. Second, for a shareholder to take a distribution that is non-taxable, the shareholder must demonstrate they have adequate stock basis to take a non-taxable distribution. Third, when the shareholder transfers, sells or otherwise disposes of their stock, the correct basis of the stock must be determined for the shareholder to determine the gain or loss on such disposition. Therefore, it is extremely important for a shareholder in an S corporation to calculate and keep an accurate accounting of their S corporation stock basis.
Given that knowing the basis is so important, how do you calculate the stock basis in an S corporation? The shareholder would start with their initial contribution of cash and/or property to the S corporation, thus their capital contribution to the corporation, which is actually the same for a C corporation. Thereafter, this basis amount will increase and/or decrease by the amount of pass through items from the S corporation. Because an S corporation is a pass through entity, the items of income, gain, loss etc. are passed through to each shareholder and these items will impact each shareholder’s individual basis in the stock. An item of income that is passed through to a shareholder will increase their stock basis and an item of loss or deduction will decrease their stock basis. These items are reported on a K-1 to each shareholder. Items that will increase stock basis are ordinary income, separately stated income items, tax exempt income and excess depletion. Items that will decrease stock basis are ordinary losses, separately stated loss items, nondeductible expenses, non-dividend distributions and depletion for oil and gas.
As somewhat stated above, only a non-dividend distribution will reduce stock basis as dividend distributions do not reduce stock basis. Generally, most of the distributions made by an S corporation will be non-dividend distributions and thus reduce stock basis.
If you have tax questions related to your business, you can speak with a Denver tax attorney by contacting The McGuire Law Firm. A free consultation with a tax attorney in Denver is provided to discuss your tax questions and issues.