Frequently Asked Questions
What is the basic principle behind stock basis in an S corp?
The basic principle behind stock basis in an S corporation (S corp) revolves around the initial investment made into the corporation and the subsequent adjustments made due to income, losses, and distributions.
For instance, if you invest $500 into an S corp, your initial stock basis would be $500. If the S corp earns $100 in income, this income is not taxed at the business level but is passed onto you, the shareholder, via a Schedule K-1. This income increases your stock basis from $500 to $600.
However, it's crucial to adjust your stock basis to reflect this increase. If you sell the stock for $600 without adjusting the original $500 stock basis, you would 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 essential to enhance the stock basis from $500 to $600 when the S corp gives you the $100 in income.
As a shareholder, you are responsible for keeping records of the stock basis 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.
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