Frequently Asked Questions
Why is it important for a shareholder to keep records of the stock basis?
Maintaining records of the stock basis is crucial for a shareholder for several reasons. Firstly, it aids in determining the gains and losses upon selling the stock, as per Section 1001.
This is because the stock basis, which is the initial investment in the business, changes over time due to factors such as retained earnings. For instance, if you invest $500 in an S corp and the business earns $100 in income, the stock value increases to $600. If you sell the stock without adjusting the original stock basis, you will end up paying taxes twice on the same $100 earned by the business.
Secondly, keeping track of the stock basis helps assess the loss amount a shareholder can use, including how much should be carried forward and suspended. This is particularly important in the context of an S corp, where the debt basis of the shareholders pertains to assessing the loss amount that a shareholder can utilize.
Lastly, it helps determine the taxability of a distribution received from the business to the shareholder. This is because the tax implications of such distributions depend on the shareholder's stock basis.
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