Tracking Your S-Corporation Basis for Tax Purposes
If you own shares in an S-corporation you are required by Internal Revenue Service rules to track your ownership value in those shares or what is referred to as your basis in the shares.
Basis is the tax value of each share after annual adjustments for income, losses, and distributions. If you sell your shares of stock, your basis is the number you would use to determine gains or losses on the sale. Basis is also used to determine if any distributions are a tax-free return of your basis or are taxable.
The following are the basic adjustments required to calculate your stock basis during the period in which an S corporation election is in effect:
The basis of the stock of each shareholder is increased by each shareholder's portion of the following items:
- All income items of the corporation (including tax-exempt income) that are separately stated and passed through to shareholders;
- The income of the corporation that is not separately computed; and
- The excess of the corporation's deductions for depletion over the basis of the property subject to depletion (Code Sec. 1367(a)(1)(C)).
A stockholder's basis is decreased by his or her portion of:
- Nontaxable return-of-capital distributions by the corporation;
- All loss and deduction items of the corporation that are separately stated and passed through to shareholders;
- The non-separately computed losses of the corporation;
- Any expense of the corporation not deductible in computing its taxable income and not properly chargeable to the capital account; and
- The amount of the shareholder's deduction for depletion (Code Sec. 611) with respect to oil and gas wells (Code Sec. 1367(a)(2)(E)).
Noncash distribution- to the extent that it is treated as a return of capital, basis is reduced by the fair market value of the property.
For charitable contributions made by an S corporation after 2014, the rule that a shareholder's basis is reduced by their pro rata share of the S corporation's adjusted basis in the contributed property has been made permanent ( Code Sec. 1367(a)(2)).
This article touches on the basic rules for S-corporation basis adjustments; but tax rules and regulations are complicated and you should seek the advice of a tax professional if you have any questions.