The Importance of S Corp Basis

This post is in: Business

confusedMany people start their businesses off in an S Corporation or an LLC electing S Corp tax treatment (LLC-S).

An S Corp is easier to manage and the losses will flow through to the owner, so it’s a good choice for many.

The trouble comes, though, when S Corporation shareholders get lulled into thinking an S Corporation tax calculation is uncomplicated and straightforward. It’s not. For example, the losses from an S Corporation are only deductible if you have sufficient basis.

Each S Corporation shareholder is required to keep stock basis and loan basis. If there is a loss, the basis is reduced as the shareholder takes the deduction for the loss on their tax return. The basis can’t be negative, in other words, if the loss is more than the basis, then the loss is suspended until the basis is restored.

The shareholder can restore basis by making a loan to the company or by the company having a profit in a subsequent year.

The bottomline that the IRS is counting on, as they plan more and more audits with their increasing audit force is this: Most shareholders don’t have the basis paperwork they need to prove the loss. And without that paperwork, the loss is lost. And that means tax, penalties and interest. Count on it.

The GAO is calling for S Corporation targets. If your S Corp has a loss, get ready. One of the first questions will be: “Where is your basis paperwork?”

Get ready for the coming S Corporation audits by making sure you have the paperwork you need. We’ll be covering this in detail as part of the March coaching session “Filing Your S Corporation Tax Return.”

Join now at USTaxAid Coaching.


  1. Thomas Rockford says:

    When the shareholder’s basis goes to zero due to losses, does additional loss then result in the Net Operating Loss Carryover? Is that what is referred to when you say “the loss is suspended until the basis is restored”?

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