Shareholder Basis

What is shareholder basis?

Shareholder basis is your tax investment in S corporation stock. It starts with what you paid for shares and increases with your share of income and additional contributions. It decreases with distributions and your share of losses. Basis determines how much loss you can deduct, whether distributions are tax-free, and your gain or loss when you sell shares. Tracking basis accurately is essential for S corporation owners.

How basis changes each year

At year end, add your share of S corporation income reported on K-1. Add any additional capital contributions. Then subtract distributions received and your share of losses. The calculation follows a specific ordering. You cannot deduct losses exceeding your basis. Unused losses carry forward until you have sufficient basis. Your accountant should maintain a running basis schedule each year.

When basis causes problems

Taking distributions that exceed basis triggers capital gains tax. Losses limited by basis cannot reduce your taxable income until you restore basis. Selling shares when basis is unclear creates tax uncertainty. Many S corporation owners neglect basis tracking until they need it for a transaction or audit. Maintain records from day one. Reconstructing basis years later is difficult and expensive.