The consequences of distributions to the shareholders and the corporation are discussed further.Shareholders in an S corporation must keep careful track of their tax basis.
Many S shareholders have two investments in the corporation - the investment in corporate stock and loans made to the corporation.These shareholder assets have tax bases which may change regularly as a result of corporate events.The beginning basis for stock is the amount the shareholder invested to obtain the stock.The beginning basis for debt is the amount the shareholder loaned to the corporation.Stock Basis Rules Under the proposed regulations, the basis of stock is adjusted in the following order: Increases a.Distribution source and shareholders' basis for their corporate investment determine the tax consequences of distributions from S corporations.
The regulations being proposed under IRC Secs 13 provide the particulars of adjustments to stock basis and distributions to S corporation stockholders.
The proposals list an ordering rule for the adjustment, either increases or decreases, of stock basis.
They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.
Capital contributions by shareholders to the corporation; b.
Separately stated income items (whether taxable or not); c. Excess of depletion deductions over basis of property subject to depletion. Non-deductible expenses that are not properly chargeable to a capital account also reduce stock basis; b.
The shareholder's oil and gas depletion deduction; c. Non- separately computed losses that pass through; and e. Reducing stock basis for non-deductible items prevents a shareholder from converting a non-deductible expense at the corporate level into a deductible expense when stock is sold or a liquidating distribution is received.