Frequently Asked Questions

How does the income of an S corp affect the stock value and the stock basis?

The income of an S corporation (S corp) directly impacts the stock value and the stock basis. When an S corp earns income, it is not taxed at the business level but is passed on to the shareholders via a Schedule K-1. This income is then taxed on the shareholder's Form 1040. If the S corp retains the income, the stock value increases proportionately. For instance, if you invest $500 in an S corp and it earns $100 in income, the stock value will rise from $500 to $600. However, it's crucial to adjust the original stock basis to reflect this increase. If you sell the stock for $600 without adjusting the original $500 stock basis, you will be taxed twice on the $100 gain - once when the income was earned and allocated to you, and again upon selling the stock. Therefore, it's necessary to increase the stock basis from $500 to $600 when the S corp allocates the $100 income to you. This way, if you sell the stock for $600, there will be no additional gain.