S corp what is basis

The parties should maintain written notes with a fixed repayment schedule and a fair market rate of interest at least equal to the applicable federal rate, similar to what a shareholder would execute with unrelated parties. Kinkaid, CPA, J. Federanich, CPA. Also in the December issue:. Making the right moves now can help you mitigate any surprises heading into Worldwide leaders in public and management accounting.

Toggle search Toggle navigation. Breaking News. S corp. Also in the December issue: A discussion of S corporation current developments. Part 3 of a comprehensive look at reporting foreign trust and estate distributions. A look at key considerations for tax engagement letters and organizers. Most Read. Basis should be identified from the very beginning of the tax year, as the basis begins once the stock is acquired. The basis must first be increased by utilizing the above-mentioned items, decreased by distributions, and then decreased again by any deductions or losses.

This order of calculating basis is important to remember because if your stock basis is above zero before distributions, but would be below zero if all deductions were subtracted, then any additional loss would be removed rather than being taxable. If your S Corp is new, then it is much simpler to reconstruct the basis. However, reconstructing for a business that opened its doors 25 years ago is much more difficult as you will need documentation from every year that the company was in business when calculating the updated stock basis for the company.

If the company has an incorrect initial stock basis, then your stock basis every year thereafter will also be incorrect. S-Corporation basis matters because it has everything to do with the taxability of the money you receive from your business:. But how do you track the amount of your basis? It is rare for S-Corporation shareholders to take dividend distributions, because dividends are taxed twice: the corporation pays a tax on the dividends it pays to you, and each recipient pays an income tax on the dividends they receive.

One of the main reasons the IRS wants you to file the S is so you can show them your annual basis calculations. See how it all comes together? Our goal is to get you to the point where you can converse with your tax professional on the finer points of basis calculations.