Stock Basis S Corp: Everything You Need to Know
Stock basis will identify the amount of money in which the shareholder invested, but this number can constantly change. 3 min read
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.
Recreating Your Stock Basis
If you need to reconstruct or otherwise recreate the company’s basis, you will need to ensure that you follow the procedure laid out below. It’s not difficult to calculate; it is difficult finding all of the S Corp’s Schedules K-1, along with the capital contributions records.
If your S Corp is new, then it is much simpler to reconstruct the basis. However, reconstructing for a business that opened its doors 25 years ago is much more difficult as you will need documentation from every year that the company was in business when calculating the updated stock basis for the company.
Once you have gathered all required records, you must accumulate the yearly increases, along with decreases, from the company’s inception to date. If the company has an incorrect initial stock basis, then your stock basis every year thereafter will also be incorrect. Therefore, just because you have the stock basis for every year, this doesn’t mean that it is necessarily correct. It is also important for you to keep all records on file in the event that the IRS audits your S Corp.
If you need help learning about your S Corp’s stock basis, or calculating your stock basis, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.