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Frequently Asked Questions

What is the purpose of debt basis in relation to shareholder losses?

The purpose of debt basis in relation to shareholder losses is to allow the utilization of losses that exceed a shareholder's stock basis. In the context of an S corporation, the debt basis of shareholders is crucial in determining the amount of loss a shareholder can claim.
It's important to note that the debt basis does not apply to the determination of loss or gain on the sale of the stock, nor does it affect the taxation of distributions from an S corporation.
The debt basis is calculated by assessing the initial basis of the shareholder's stock, which is not determined by an S classification. Instead, it is determined by several factors. Under Section 358, if a shareholder acquires shares through the establishment of the business, the basis in shares is equivalent to the cash, including the adjusted tax basis of property contributions.
If a shareholder purchases stock, the initial basis is the cost, as prescribed under Section 1012. If the shareholder holds stock in a C corporation that transitions into an S corporation, the initial basis of the shareholder’s S corporation stock is the basis in the C corporation upon conversion.
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