## Stock Basis S Corp

Stock Basis S Corp seems like a simple concept, however, calculating basis for S Corp stock can be quite complex, particularly for a business with several financial transactions and many shareholders. Stock basis will identify the amount of money in which the shareholder invested, but this number can constantly change. While the C Corp stock basis remains the same throughout the year, the S Corp stock basis can change based on the shareholder’s annual income, distributions, and loans.

It is important to properly calculate the stock basis, as it will determine how much money you can obtain from the corporation without having to realize a capital gain or income. Therefore, this number should correctly reflect how much money you invested in the business. Any adjustments to the stock basis are made at the end of the taxable year.

When people invest in a company or participate in a business endeavor, they generally don’t consider what their stock basis could be in the future once the venture is over.

Since calculating your stock basis can be incredibly complex, it is important to hire a tax professional who can track your stock basis from the beginning of the taxable year. This number is also used to determine depreciation, amortization, depletion, casualty losses, and any other gain or loss that is realized throughout the year.

## Stock Basis: Defined

When thinking about one’s stock basis, the easy way to compare is to think of a checking account. The stock basis is the money that is deposited into the account and the earnings are the withdrawals. Similar to a bank account, you cannot withdraw more money than you have in the account. Therefore, your account cannot go below zero, as is the case with stock basis. Basis should be identified from the very beginning of the tax year, as the basis begins once the stock is acquired. It is your responsibility as a shareholder to calculate your stock basis, as the corporation does not oversee one’s stock basis.

## Stock Basis: Calculation

The initial basis is usually one of the following:

• The amount of cash that was paid for the S Corp shares

• Property that you donated to the business

• Carryover basis if you were gifted shares

• Stepped-up basis if you inherited shares

• Basis of C Corp stock when the business structure converted to an S Corp

Some items that could increase stock basis include capital contributions made by the shareholder, ordinary income received, and investment income/gains realized by the shareholder. Some items that would ordinarily decrease one’s stock basis include Section 179 deductions, charitable donations, non-deductible expenses, and distributions.

The basis must first be increased by utilizing the above-mentioned items, decreased by distributions, and then decreased again by any deductions or losses. This order of calculating basis is important to remember because if your stock basis is above zero before distributions, but would be below zero if all deductions were subtracted, then any additional loss would be removed rather than being taxable. Furthermore, the shareholder’s stock basis is decreased by the taxable year’s losses, regardless of whether or not the loss or deduction is allowed under any other rules, i.e. passive loss rules.