In computing stock basis, the shareholder starts with their initial capital contribution to the S corporation or the initial cost of the stock they purchased (the same as a C corporation). An income item will increase stock basis while a loss, deduction, or distribution will decrease stock basis.
How are profits from an S corp taxed?
S-corporations are pass-through entities. That is, the corporation itself is not subject to federal income tax. Instead, the shareholders are taxed upon their allocated share of the income. Shareholders do not have to pay self-employment tax on their share of an S-corp’s profits.
What does it mean to have stock basis in S Corp?
With an S corp, the stock basis varies depending on the shareholder’s annual income, loans, and distributions. If you own an S corporation, it’s critical to correctly calculate each shareholder’s stock basis since it indicates the amount he or she can receive from the corporation without realized gain.
How are basis adjustments calculated for a corporation?
Basis adjustments are normally calculated at the end of the corporation’s taxable year. First, they are increased by income items; then decreased by distributions; and, finally, decreased by deduction and loss items.
How is a debt basis created in a S corporation?
Basis is often created when a shareholder borrows from a bank and turns around and lends the money to the corporation. This situation bears some risk, and shareholders should follow the debt basis rules carefully. The S corporation should make loan repayments to the shareholder, who then pays the bank,…
How are S Corp distributions in excess of basis taxed?
Distributions that exceed the stock basis will be generally taxed as long-term capital gains on the personal tax returns of shareholders. Currently, the rate for long-term capital gains is 15 percent. If you need help with S corp distributions in excess of basis, you can post your legal need on UpCounsel’s marketplace.
