Frequently Asked Questions

What are the different cases to consider when determining the initial basis of a shareholder's S corp stock?

Determining the initial basis of a shareholder's S corp stock involves considering several different cases. The first case, as outlined under Section 358, is when a shareholder obtains shares through the creation of the business. In this scenario, the shareholder's basis in shares is relative to the cash invested, including the adjusted tax basis of property contributions. The second case to consider is when a shareholder acquires stock through purchase. According to Section 1012, the initial basis in this situation will be the cost of the stock. The third case is when a shareholder retains stock in a C corp that later converts into an S corp. In this instance, the initial basis of the shareholder’s S corp stock is the basis in the C corp at the time of conversion. It's important to note that the shareholder, not the business, must keep records of the stock basis. This is crucial for determining losses and gains on the selling of the stock, assessing the loss amount a shareholder may use, and determining a distribution’s taxability received from the business to the shareholder.