Frequently Asked Questions

How should one assess the initial basis of the stock of a shareholder in an S corp?

Assessing the initial basis of the stock of a shareholder in an S corp is a crucial process that involves several steps. Initially, when you create an S corp by investing a certain amount, for instance, $500, this becomes your initial basis in the S corp stock. This basis can change over time, for example, if the S corp earns income, the stock value increases, and so does your basis. It's important to note that the income is not taxed at the business level but is sent to you on a Schedule K-1, and you pay taxes on it from Form 1040. If the business retains the income, the stock value increases, and you must adjust your original stock basis accordingly to avoid paying taxes twice on the same income. As a shareholder, you must keep records of the stock basis, not the business. This is because you need to determine losses and gains on the selling of the stock, assess the loss amount a shareholder may use, and determine a distribution’s taxability received from the business to the shareholder.