CALCULATING SHAREHOLDER BASIS IN S CORPORATION DISTRIBUTIONS

CALCULATING SHAREHOLDER BASIS IN S CORPORATION DISTRIBUTIONS

Calculating the basis in S corporation distributions is crucial for shareholders.

 Here’s a step-by-step guide on how to determine your basis:

1.    Starting Basis

Begin with the initial tax basis, which is what you paid or contributed to acquire your S corporation stock shares. If you paid cash, your starting basis would be the cash amount you paid for those shares.

2.    Annual Adjustments

o   Income and Losses

Each year, your stock and/or debt basis of the S corporation increases or decreases based on the company’s operations. The S corporation will issue a Schedule K-1, reflecting items of income, loss, and deduction allocated to you. Remember that the K-1 shows the amount of non-dividend distribution you receive; it does not state the taxable amount of a distribution.

o   Non-Dividend Distributions

If you receive a non-dividend distribution from an S corporation, it is tax-free to the extent it does not exceed your stock basis. Debt basis is not considered when determining the taxability of a distribution.

o   Loss or Deduction Items

To claim an S corporation loss or deduction item, you must have adequate stock and/or debt basis. Keep in mind that at-risk and passive activity loss limitations may also affect your ability to claim certain loss and deduction items.

3.    Ordering of Items

o   Increase Basis First

When calculating basis, increase the necessary stock basis first.

o   Subtract Distributions

Subtract any distributions before losses.

o   Deduct Non-Tax-Deductible Costs

Deduct any costs that aren’t tax-deductible.

o   Consider Other Loss or Deduction Items

Finally, consider any other loss or deduction items. Your stock basis cannot fall below zero.

Remember that maintaining an accurate basis is essential for correctly reporting S corporation distributions and ensuring compliance with tax regulations. If you have any specific questions or need further assistance, consult a tax professional to navigate the complexities of S corporation basis calculations.

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