A shareholder’s original basis
in Subchapter S corporation stock is computed in a similar manner as that of a C
corporation. Unlike a C corporation, where the basis of stock
remains constant unless additional shares are purchased or shares are
sold; basis in Subchapter S corporation stock will increase or decrease based on
certain adjustments. Note: Basis cannot be reduced below zero.
—Increase adjustments to basis:
• Additional Subchapter S corporation stock purchases and capital contributions.
• Separately stated income items, including tax-exempt income.
• Nonseparately stated income.
• Depletion in excess of the basis in the property.
—Decrease adjustments to basis:
• Distributions that were not included in
the Subchapter S corporation shareholder’s income.
• Separately stated losses and deductions.
• Nonseparately stated losses.
• Nondeductible Subchapter S corporation expenses.
• Depletion to the extent it does not exceed the basis in the property.
Subchapter S Corporation Liabilities
The liabilities of a partnership increase a
partner’s basis in a partnership. The liabilities of a Subchapter S corporation DO
NOT increase a shareholder’s basis. The only exception to this rule
applies when an individual shareholder directly loans money to the
Subchapter S corporation. Various court cases have ruled that personal guarantees will
not increase the basis.
Limit On Subchapter S Corporation Losses And Deductions
The amount of losses and deductions a
shareholder can take is limited to the adjusted basis of the shareholder’s
Subchapter S corporation stock, plus any direct loans the shareholder makes to the corporation. The
basis adjustment for a distribution is taken into account before applying
the loss limitation for the year.
Basis Of C Corporation Stock Converted To
Subchapter S Corporation
When a C corporation converts to Subchapter S corporation status,
the shareholder’s stock basis in the C corporation becomes the beginning
stock basis in the Subchapter S corporation. This basis applies for purposes of
limits on deductibility of Subchapter S corporation losses. A Subchapter S corporation
shareholder cannot deduct losses in excess of basis, even if C corporation
earnings were transferred to the Subchapter S corporation.
Subchapter S Corporation Shareholder Loses Basis On Transfer Of
Building Although Remaining Personally Liable For Debt
Under IRC §358(a) a shareholder’s basis
in Subchapter S corporation stock received for a §351 transfer is the shareholder’s basis in the
property before transfer, minus the amount of liabilities to which the
property is subject, plus the amount of gain recognized under IRC §357(c)
to the extent liabilities exceed basis. All liabilities secured by the
transferred property must be deducted from basis even if the Subchapter S corporation
shareholder
remains personally liable for the debt. [TAM 9640001] IRS did not accept
the shareholder’s argument that, because his obligations were unchanged,
his basis in the Subchapter S corporation stock received for the transfer should be the same as his
adjusted basis in the building before transfer.
At-Risk Limitation
The amount of losses deductible on the
Subchapter S corporation shareholder’s individual tax return is further limited to the
shareholder’s at-risk basis.
The amount at risk equals:
• Shareholder’s cash contributions and
the adjusted basis of other property that the shareholder contributed to
the Subchapter S corporation, plus
• Amounts borrowed for use in the activity that the Subchapter S corporation
shareholder is
personally liable for the repayment of, or has pledged property not used
in the activity as security for the borrowed amount.
