Stock Basis (S Corporation)

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.