How Basis Works
Typically, stock basis in an S Corporation begins with the capital contribution you make to get the company started. Note that when you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.
At the end of each taxable year, your stock basis is adjusted to reflect your business’s operating results. Taxable income increases your basis, while losses reduce it. Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That is the basis you have in loans you make to your company.
However, once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. You can generally take suspended losses in future years, when you again have basis.
You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.
Make the time to discuss how basis affects your individual income tax return with your CPA or tax advisor. They can guide you through the rules.
This is general information and should not be acted upon without first determining its application to your specific situation. Please contact your CPA or tax advisor for additional details.
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