Frequently Asked Questions
How is the tax basis for S Corps calculated and what factors are considered in this calculation?
The tax basis for S corporations is calculated by considering the total of the stock basis and loan basis, also known as the debt basis. For instance, if you invest $20,000 in the corporation and loan the company $5,000, your tax basis would be $25,000. This tax basis is then adjusted by certain pass-through items such as net income, losses, and deductions. When calculating the tax basis, it's important to first calculate the stock basis, which must be $0 or greater, and then factor in your loan basis, which also must be $0 or greater. For example, if you invested $20,000 and received 100 shares of stock, and another investor, John, also invested $20,000 receiving 100 shares of stock, your tax basis would be $25,000 (the investment plus loan), while John’s tax basis would be $20,000. The tax basis calculation is crucial in S corporations as they are flow-through entities, meaning the profits and losses flow through the corporation to the owners and shareholders. These individuals must report such profits and losses on their personal tax returns, limited to the amount of capital they invested in the business.
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