Series 22: 2.4.2. Stock And Debt Basis: S Corporations

2.4.2.  Stock and Debt Basis: S Corporations

Basis for a partnership and for an S corporation differ in one important respect. A partnership’s debt is added to the outside basis of each of its partners. Debt incurred by an S corp is not. This is because shareholders generally are not liable for a corporation’s obligations, and a loan does not increase a shareholder’s ownership interest. Only when a member or shareholder makes a direct loan to the S corp does it become part of that shareholder’s basis.

A shareholder’s tax basis is broken up into two components:

• stock basis

• debt basis (if any)

Stock basis is the amount of money contributed to an S corp in exchange for its stock. Adjusted stock basis is increased by the partner’s share of the corporation’s ordinary income, capital gains, and depreciation in excess of basis. It is decreased by ordinary losses, capital losses, non-taxable distributions (i.e., charitable contributions), and depleti