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What is Basis?

Basis represents the amount of after tax money you used to acquire an asset. Typically, basis is the cash you paid for property like the amount you paid for a car, house or publicly traded stock.

For assets like these, this matters when you sell the asset later. At that time you’ll recognize a gain if the selling price is more than the price you paid (or basis). Or you’ll have a loss if the selling price is less than your basis.

What is basis for S corporation shareholders?

Unlike other assets, the basis of your stock in an S corporation goes up and down over the years. As you know, S corporations do not pay taxes directly, rather annual income and loss flows to the shareholders’ individual tax returns and they pay tax on any that at their individual level.

So in effect every time the S corporation has a profit on which the shareholder pays individual income tax, more after tax dollars are added to basis in the S corporation shares. Likewise, the basis is reduced when there are business losses that reduce other income on your personal return like wages. If you make additional capital contributions to the S corporation or you take out distributions that will also impact your basis because you’re adding or removing after-tax dollars.

Why should you care about basis?

Generally, the deduction for your share of losses and deductions is limited to the basis of your stock and loans from you to the corporation. As a shareholder, you are responsible for keeping track of your own basis. But it’s a complicated calculation that most shareholders don’t know how to calculate and don’t understand its impact on taxable income.

As a result, many S shareholders have been taking a deduction for disallowed losses. The IRS is taking notice and taking steps to make sure only allowed losses are included on shareholders’ returns.

The 2018 Schedule E now requires that a basis calculation be attached to returns that include a loss from an S Corporation that shows there is sufficient basis to absorb the loss. A new checkbox, line 28(e), calls out the need for the basis statement.

This is where BasisCalc comes in. We calculate your basis using the values on your Schedule K-1 plus a few other amounts you need to provide. Based on this we create a Shareholder Basis Statement you can print to PDF and attach to your electronically filed return.

While anyone can calculate their basis, it's very complicated. We're now going to show just how complicated by explaining basis a lot more detail. You'll appreciate just how much easier BasisCalc makes your life.

Basics About Basis

S Shareholder’s Stock Basis

Beginning Stock Basis
+ Contributed Cash & Property
+ Income Items (including portfolio & tax-exempt)
– Distributed Cash & Property
– Non-deductible Expenses
– Loss Items (including §179 deduction)
=
Ending Stock Basis
      

Initial Basis

Increases in Basis – IRC §1367(a)(1)

Decreases in Basis – IRC §1367(a)(2)

Other Adjustments

Cancellation of Debt

Items that Don't Impact Stock Basis

Calculating S Shareholder Debt Basis

Beginning Debt Basis
+ New Current Year Loans
– Loan Repayments
– Loss Items in Excess of Stock Basis
=
Ending Debt Basis