• Increased for income items and excess depreciation
• Decreased for corporate distributions
• Decreased for non-deductible, non-capital expenses and depletion
• Decreased for items of loss and deduction

When a shareholder is determining the taxability of a non-dividend distribution, the shareholder’s stock basis is considered, but not the debt basis in the stock.  If the corporation has loss and other deduction items, and these items exceed the shareholder’s stock basis, the shareholder can deduct these excess up to their basis in loans they have personally made to the corporation.  Although, a shareholder’s debt basis in their stock is computed similarly to their stock basis, some differences exist.

When a shareholder has S corporation losses and deduction items and these items exceed their stock basis and these items are claimed based off of the shareholder’s debt basis, the debt basis is reduced by the amount claimed for the loss items and deduction items.  When an S corporation repays reduced basis debt to the applicable shareholder, a part or all of the loan repayments can be taxable to the shareholder.

Below is an example of the ordering rules.  Josh is the sole shareholder of an S corporation and has a $20,000 stock basis and K-1 reflecting:

(20,000) Ordinary Business Income

5,000 Net Section 1231 Gain

5,000 Charitable Contributions

1,000 Non Deductible Expenses

15,000 Distributions

The basis will first be increased by items of income, so the $20,000 basis is increased by the 1231 gain to $25,000.  Then the basis is reduced by $15,000 of distributions to $10,000, and because the shareholder has adequate basis, the distribution is not taxable.  Thereafter, the basis would be reduced by $1,000 for non-deductible expenses to $9,000.  Josh has $25,000 of losses from the ordinary loss and the charitable, and this loss exceeds his stock basis.  Thus, Josh would need to have adequate debt basis to take the loss. Josh would pro rate the loss and deductions to determine the amount that would currently be deductible.

It is important to properly track your basis in an S corporation.  If you have tax or business questions related to your business, contact a Denver tax attorney at The McGuire Law Firm.  A free consultation with a Denver tax attorney is provided to potential clients.

Contact The McGuire Law Firm to speak with a tax attorney in Denver, Colorado.

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.