What is the Stock basis in an S Corporation?
Stock basis in an S Corporation is the running total of a shareholder's tax investment in the company. It starts with the initial capital contribution, increases by each year's allocated income and additional contributions, and decreases by distributions taken and allocated losses. Basis determines whether distributions are tax-free returns of investment or taxable capital gains - distributions up to basis are not separately taxed, while amounts exceeding basis trigger capital gains. S Corporations require annual basis tracking because distributions that exceed basis create immediate tax consequences for the shareholder.
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