S Corporation Shareholder Basis

Every S Corporation shareholder has what the tax code calls a basis in their stock, which represents the shareholder's tax investment in the company and plays a critical role in determining the tax treatment of losses and distributions. Basis starts with the amount the shareholder paid for their shares and is increased by additional capital contributions and the shareholder's share of S Corporation income, and it is reduced by distributions and the shareholder's share of losses. A shareholder can only deduct their allocated share of S Corporation losses up to the amount of their current basis, and any losses that exceed basis are suspended and carried forward until future years when basis is restored. If a distribution from the S Corporation exceeds the shareholder's stock basis, the excess is treated as a taxable capital gain rather than a return of investment. Tracking basis accurately is one of the more technically demanding parts of S Corporation ownership, and getting it wrong can lead to incorrect tax returns and missed loss deductions.