S Corp Basis - For Dummies

There are two types of basis for an S corporation: Debt Basis and Stock Basis.

Both are important for tax purposes and help you track how much money you’ve invested in the business. Knowing your basis helps you figure out how much money you’ve made (or lost) when you sell your business or close it down. It’s also important when you want to take money out of your S Corp or run your business expenses on personal tax return. Let’s break it down, so it’s super clear!

What Is Shareholder Stock Basis?

Your shareholder stock basis is the amount of money you’ve put into the S corporation. This could also be the money you used to buy your shares (stocks) in the business. Think of it like the cash you put into your bank account. Your bank balance changes over time because of things like deposits, profits, losses, or cash you take out.

S Corp Basis Formula (very simplified)

Stock Basis = Initial Investment + Company Profits - Distributions - Losses

Let’s see how your basis changes with a simple example:

• Starting Basis: Imagine you put $100,000 into your S Corp to start your business. Your basis starts at $100,000.

• Profits: If the company earns $5,000, your basis goes up by $5,000 and becomes $105,000

• Distributions and/or Losses: If you withdraw $10,000 out of the company, your basis goes down by this amount and our basis becomes $95,000

Please remember: basis cannot be less than zero! If your basis is zero and you just took out a huge amount of money from your company, you're asking for trouble and/or your accounting is really messed up.

Of course, this is a very simplified explanation of the S Corp stock basis. There are more items that affect your basis and there is also an order how basis is calculated. Ready for a more complicated explanation? Journal of Accountancy does a wonderful job of over-complicating things. Want a dummied down version? In this case, keep on reading!

Debt Basis: What’s That All About?

Okay, so now we’ve talked about shareholder basis, but there’s another thing called debt basis. Debt basis comes up less often and CPAs usually bring it up when your stock basis is close to zero and you need to deduct business expenses or take a big amount of money out of your company without triggering capital gains. Here is how debt debit works: If you personally lend money to your S Corp, your debt basis goes up. If you repay this loan, your debt basis goes down. While your debt basis is high and you have not repaid yet, you can use this extra debt basis to cover deductions or withdrawals that are bigger than your stock basis.

But here’s the catch: if the company borrows money from someone else, it doesn’t count for your debt basis—only your own loans to the company matter.

Let’s look at another example to see how this works:

Example: Imagine you lend $30,000 to your S corporation. Now, your debt basis is $30,000 at the start of the year. Later, you find out that the company has had a big loss and you can deduct $4,000 of it. Plus, the company repays $2,000 of your loan.

So here’s what happens:

• Your debt basis starts at $30,000.

• You subtract the $4,000 loss deduction (because you can use your debt basis to cover losses).

• You also subtract the $2,000 repayment (because the company gave you back some of the money you loaned it).

  
  

By the end of the year, your debt basis is now:

• $30,000 (start) - $4,000 (loss deduction) - $2,000 (repayment) = $24,000.

  
  

So, your debt basis is $24,000 at the end of the year, and this allows you to claim additional 24k of business losses. Or you can also withdraw up to 24k from your corporation without triggering any tax consequences. Woohoo!

Important Reminder About Debt Basis

One last thing—guaranteeing a loan doesn’t automatically increase your debt basis. For example, if you promise to pay back a loan the company owes but don’t actually make the payment yourself, your basis doesn’t change. The only way to increase your debt basis is by actually making a payment to the company, which counts as a loan to them.

In short, your basis is like a financial scorecard—it tells you where you stand with the company, how much you’ve put in, and what you can take out.

If you are still confused about S Corp Basis, please reach out! We've helped numerous business owners with their S Corp questions. You are welcome to check out our services here.