Understanding S Corporation Stock Basis: Avoiding Costly Tax Mistakes

S corporation owners must understand the concept of stock basis to avoid costly tax mistakes.

Excess distributions from S corporations can be taxed as capital gains, resulting in higher taxes.

Maintaining a positive stock basis is essential to avoid distribution in excess of basis and the associated tax consequences.

Properly managing profit and loss statements, balance sheets, and cash flow is crucial to maintaining a positive stock basis.

Taking distributions without considering the impact on stock basis can lead to significant tax liabilities.

What is stock basis in an S corporation?

—Stock basis in an S corporation refers to the amount of capital the shareholder has invested in the business. It includes contributions of cash, property, and loans to the corporation.

What happens if my stock basis falls below zero?

—If your stock basis falls below zero, it results in a distribution in excess of basis. This can lead to capital gains tax on the excess amount, potentially increasing your tax liability.

How can I increase my stock basis?

—You can increase your stock basis by making additional contributions to the corporation, loaning money to the corporation, or generating profits through the business.

What documents should I maintain to track my stock basis?

—To track your stock basis, you should maintain records of your initial capital contribution, any additional contributions or loans, and the corporation's profit and loss statements and balance sheets.

Why is it important to consult a tax professional for stock basis calculation?

—Calculating stock basis can be complex, and it's important to ensure accuracy to avoid tax mistakes. A tax professional can help you navigate the calculations and provide guidance based on your specific situation.

00:23Understanding S corporation stock basis is crucial for S corporation owners to avoid costly tax mistakes.

01:18Excess distributions from S corporations without considering stock basis can result in higher taxes.

02:27Maintaining a positive stock basis is essential to avoid distribution in excess of basis and the associated tax consequences.

03:54Properly managing profit and loss statements, balance sheets, and cash flow is crucial to maintaining a positive stock basis.

05:45Taking distributions without considering the impact on stock basis can lead to significant tax liabilities.