S-Corp Stock Basis: What It Is, Why It Matters, and How to Track It

If you own an S-Corporation, there’s one concept that quietly controls how much money you can take out tax-free, whether your losses are deductible, and whether you’ll get hit with surprise taxes later:

Your S-Corp stock basis.

Most business owners don’t think about stock basis until something goes wrong, like a distribution getting taxed, a loss being disallowed, or the IRS asking questions. But once you understand how it works, stock basis is actually pretty logical.

This guide breaks it down without accounting jargon, using real examples and plain language.

What is S-Corp stock basis?

S-Corp stock basis is essentially your financial stake in the company for tax purposes. Think of it as a running total that answers this question: How much of my own money is invested in this S-Corp after accounting for profits, losses, and distributions?

Your stock basis determines:

• How much cash you can take out tax-free
• Whether business losses can reduce your personal taxable income
• How distributions and loans are taxed
• What happens when you sell or close the business

If you don’t track your basis correctly, you can end up paying taxes you didn’t expect.

Why S-Corp stock basis matters so much

Here’s why basis is a big deal for S-Corp owners:

1. Distributions are only tax-free up to your basis. You can take money out of your S-Corp tax-free, but only up to your available stock basis. When you take out more, that excess is taxed as a capital gain.
2. Losses are limited by your basis. If your S-Corp has a loss, you can only deduct it on your personal return up to your stock basis. No basis = no deduction (even if the business really lost money).
3. The IRS cares… even if you don’t. The IRS doesn’t calculate the basis for you. They expect you to know it, and to prove it if asked.

How S-Corp stock basis starts

Your stock basis starts with what you put into the business. That means:

• Cash you invested into the S-Corp
• Property you contributed (generally at adjusted basis)

If you started your S-Corp with $20,000 of your own money, your initial stock basis is $20,000.

What increases your S-Corp stock basis

Your basis goes up when your financial stake in the company increases. Stock basis increases from:

• Ordinary business income. Your share of S-Corp profits increases your basis - even if you don’t take the money out!
• Additional contributions. Any new cash or property you put into the business.
• Certain tax-exempt income. This is less common, but still increases your basis!

Keeper pro tip: This is the part most people miss. Profit increases your basis even if you leave the money in the business!

What decreases your S-Corp stock basis

Your basis goes down when money or value comes back to you, or when business losses occur. Your basis goes down with:

• Distributions. Money you take out of the S-Corp.
• Losses. Your share of S-Corp losses decreases your basis.
• Nondeductible expenses. This is less common, but if your S-Corp has expenses, such as fines and penalties, that aren’t deductible for tax purposes, your share of these expenses will decrease your basis.

The Golden Rule of S Corp Basis (Order Matters)

The IRS requires basis adjustments in a specific order each year:

1. Increase for income
2. Decrease for distributions
3. Decrease for nondeductible expenses
4. Decrease for losses and deductions
   

Keeper pro tip: Timing matters. Taking a distribution after the end of a profitable year is very different from taking it before year-end. 

What does this mean? Here’s a simple example:

• You own 100% of an S-Corp.
• You start with $30,000 of basis.
• Your S-Corp earns a profit of $20,000.
• You take a distribution of $35,000.
• You don’t report any losses.

Here’s what a tax pro is doing in their head (in order of operations):

1. Basis increases: $30,000 starting basis + $20,000 profit = $50,000
2. Basis decreases: $50,000 (calculated in step 1) - $35,000 distribution = $15,000 remaining basis

Result: Your entire distribution is tax-free, and you still have $15,000 of basis left.

What happens if you take more than your basis?

This is where people get burned. Let’s do the math again.

Your stock basis before distribution is $25,000.

You take a distribution of $40,000.

Surprise! The first $25,000 is tax-free because you had $25,000 in basis before the distribution. BUT the remaining $15,000 ($40,000 distribution - $25,000 basis) is taxed as a long-term capital gain.

Beware: Stock Basis vs. Loan Basis (hint: they’re not the same!)

S-Corps have two types of basis:

1. Stock basis: 
   
   1. Comes from ownership
   2. Is used for distributions and losses.
2. Loan basis: 
   
   1. Comes from money you (not a bank!) personally lend to the S-Corp
   2. Allows you to deduct losses beyond stock basis
   3. Does not allow tax-free distributions

Can an S-Corp have negative basis?

No. Your stock basis can never go below zero. Once it hits zero:

• Distributions become taxable
• Your share of S-Corp losses can’t be deducted. Instead, the losses are suspended (carried forward to a later year when you have enough basis to deduct them).

What happens if you haven’t been tracking your stock basis at all?

Many S-Corp owners fail to track their stock basis until something big happens, like they sell the business, get audited, or their CPA asks for it. But when that need arises, sometimes reconstructing that basis retroactively is difficult and time-consuming. The sucky part? If you can’t prove your basis, the IRS assumes it’s zero.

And when the IRS assumes your basis is zero, then something not-so-fun happens:

• If you’ve been taking distributions over the years thinking they were tax-free returns of capital, the IRS could retroactively tax them all as capital gains. Uh-oh.
• If you’ve been deducting losses, those deductions could also be disallowed, and the tax bill and penalties could be HUGE.

Here’s how to reconstruct your basis. Start by gathering:

• Original stock purchase documents or formation records
• All K-1s from every year to show your share of income/losses
• Records of the capital contributions you made
• Records of the distributions you received

Then, backtrack calculating your basis year-by-year. It might be worth working with a CPA who specializes in S-Corps to help you work through the ins-and-outs. Want some tax help? Book a call with one of Keeper’s in-house tax pros!

How do you track S-Corp basis?

Keep a record of each of these things every year:

• Your beginning basis
• Income allocated to you (you can get this from your Schedule K-1)
• Distributions you took
• Losses and deductions allocated to you (also from your Schedule K-1)
• Additional contributions you made
• Loans you personally made to the business

Need help getting started? Our tax pros can help. Your first consultation is free!

The 6 most common S-Corp stock basis mistakes

Taking distributions without checking basis

Distributions are only tax-free up to your basis. If you take a $50,000 distribution but your basis is only $30,000, the excess $20,000 is taxable as a capital gain. Many shareholders don't realize this until the IRS comes knocking.

Assuming your profits aren’t taxable unless they’re withdrawn

S-corp income is taxable to you whether you take it out or not. If the S-corp makes $100,000 and you own 50%, you owe tax on $50,000 even if you leave all the money in the business. This is "phantom income" - you pay tax but don't get cash. The upside: this income increases your basis, making future distributions tax-free.

Confusing loan basis with stock basis

These are two separate calculations tracked independently. Stock basis comes from your ownership stake. Loan basis comes from money you personally lend to the S-corp. You can only deduct losses up to the sum of both, but they have different rules - loan basis must be repaid before being restored, and distributions don't reduce loan basis. Mixing them up causes major tax errors.

Forgetting to increase basis for income

Every year your share of S-corp income (from your K-1) increases your basis, even if you don't take distributions. This is crucial because it creates "room" for future tax-free distributions. If you skip this step, you'll incorrectly treat distributions as taxable gains.

Letting basis hit zero

Once basis hits zero, you can't deduct any more losses - they become "suspended losses" that carry forward until you create more basis. Also, any distributions you take with zero basis are fully taxable as capital gains. This often catches people by surprise in loss years when they're already cash-strapped.

Not tracking your basis year over year

Basis calculation is cumulative - you need data from every year since you acquired the stock. Trying to reconstruct 10 years of basis from scratch is expensive, time-consuming, and sometimes impossible if records are lost. Update your basis worksheet every single year when you receive your K-1.

If you want help avoiding these expensive mistakes or understanding and tracking your S-Corp basis (without drowning in spreadsheets or CPA-speak), this is exactly the kind of thing a tax professional should be proactively managing for you. Book a free consultation with an experienced Keeper tax professional. We’re here to help!