Debt Basis (S Corporation)

Debt basis is a second, separate basis account an S corporation shareholder gets for money the shareholder personally lends to the corporation. When losses exceed stock basis, the shareholder can deduct additional losses up to their debt basis. Only bona fide direct loans from the shareholder to the corporation count: personally guaranteeing a bank loan creates no debt basis, no matter how real the exposure feels, which is one of the most common and costly S corporation mistakes. Losses absorbed by debt basis reduce it below face value; if the corporation later repays the loan before basis is restored, the repayment itself triggers taxable gain. Future income restores debt basis before stock basis. Clean paperwork (a note, stated interest, actual cash movement) is what separates deductible losses from disallowed ones on audit.