Frequently Asked Questions

How does the debt basis of shareholders relate to assessing the loss amount that a shareholder can utilize?

The debt basis of shareholders is a crucial factor when assessing the loss amount that a shareholder can utilize. It's important to understand that the debt basis does not pertain to determining loss or gain on the selling of the stock, nor does it affect the distribution taxation of an S corp. Instead, its primary purpose is to use losses given to shareholders that surpass that person’s stock basis. To determine the shareholder basis of a corporate stock, one should assess the initial basis of the stock of the shareholder. This process is not spearheaded by an S classification. Instead, it involves looking at several cases. For instance, under Section 358, if the shareholder obtains shares through the creation of the business, that shareholder takes the basis in shares relative to the cash, including the adjusted tax basis of property contributions. If a shareholder acquires stock through purchase, the initial basis will be the cost, as prescribed under Section 1012. If the shareholder retains stock in a C corp that turns into an S corp, the initial basis of the shareholder’s S corp stock is the basis in the C corp upon conversion.