Stock basis is a shareholder's running investment account in an S corporation, and it controls three things: how much loss the shareholder can deduct, whether distributions are tax-free, and the gain or loss on selling the stock. Basis starts with what the shareholder paid or contributed, increases each year for their share of income (including tax-exempt income), and decreases, in a strict order, for distributions, then nondeductible expenses, then losses and deductions. Basis can never go below zero: distributions in excess of basis are capital gain, and losses in excess of basis are suspended and carry forward until basis is restored. Shareholders, not the corporation, are responsible for tracking basis, and shareholders who claim losses or receive distributions generally must attach Form 7203 to their returns.
Stock Basis (S Corporation)
Primary authority: IRC §1367; Form 7203
The authority behind it
IRC §1367; Form 7203
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A shareholder starts the year with $10,000 of basis. Her K-1 shows $30,000 of income and she took $25,000 of distributions. Basis becomes $10,000 + $30,000 - $25,000 = $15,000, the distribution is fully tax-free, and she has $15,000 of capacity to absorb future losses.
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