Excite Tax's answer for Utah S-corp owners: Form 7203 goes with the return in any year you take a distribution or claim a loss, so the books track basis every year.
It is the running total of what the stock has cost you, net of what the company has earned, lost and paid out to you. It starts at what you paid for the stock, plus any capital you put in, goes up with your share of the company's income, and goes down with distributions, losses and nondeductible expenses, but never below zero.
The IRS requires Form 7203 from a shareholder who claims a loss, receives a non-dividend distribution, disposes of stock, or is repaid a loan by the company. Most owners who pay themselves distributions fall in the second group every year. In a year with none of the four, the IRS still suggests completing and keeping the form so the numbers never have a gap.
Excite Tax's short list: capital contributions, distributions and shareholder loans each in their own accounts, per shareholder, and nondeductible expenses kept apart from deductible ones. Those are the lines the basis calculation reads. The full list is below.
Excite Tax's answer: run owner pay through payroll, take everything else as a recorded distribution from a business-only bank account, close the books monthly, and roll basis forward the day the return is done. The steps are below.
A distribution from an S corporation with no old C-corporation earnings is not income up to your stock basis. The excess is taxed as gain from a sale of property, which the Form 7203 instructions say to report on Form 8949 and Schedule D. A worked illustration is below.
It waits. The loss you can deduct is capped at your stock basis plus your basis in loans you made to the company, and the rest carries forward to the next year, with no time limit. It comes back only when basis does, so the carryover belongs in the basis records too.
Basis is the number that decides two things on an S-corp owner's personal return: whether a distribution is tax-free and whether a loss is deductible. It changes every year, because stock basis in an S corporation changes every year and must be computed every year. It is also yours to keep: the IRS says tracking it is not the corporation's responsibility but the shareholder's.
The company's Schedule K-1 does not do it for you. The K-1 shows the distribution amount but does not state how much of it is taxable; that depends on a basis figure only the owner's records hold. Clean books are where that figure comes from.
The IRS sets an ordering rule, applied as of the last day of the S corporation's year:
The order is why a loss year does not automatically make distributions taxable: distributions are measured against basis before the year's losses come off. It is also why the year's distribution total has to be complete. A distribution the books missed does not disappear; it shows up later as a basis figure that is too high.
The IRS's own example, a sole shareholder with no debt basis, shows every step (IRS stock basis example):
Stock basis roll-forward for one year (IRS example)
| Step | Change | Basis after the step |
|---|---|---|
| Opening stock basis | — | $15,000 |
| Add: net section 1231 gain | +$4,000 | $19,000 |
| Less: non-dividend distributions | −$12,000 | $7,000 |
| Less: nondeductible expenses | −$1,000 | $6,000 |
| Less: allowed losses and deductions | −$6,000 of the $25,000 allocated | $0 |
The whole $12,000 distribution is tax-free, because it came off the $19,000 before any loss. Only $4,800 of the $20,000 ordinary loss is deductible that year; the other $15,200 is suspended and carries forward.
Every number in that table came from the bookkeeping: the distribution total from the distributions account, the nondeductible expenses from their own expense lines, the loss from a closed profit-and-loss statement. If any of those accounts is mixed with something else, the basis figure is wrong in the same direction.
An illustration, not a client: a Provo owner starts the year with $10,000 of basis, carried from last year's ending figure, the K-1 shows $15,000 of ordinary income, and the owner took $30,000 out during the year (income is added first).
Basis before distributions is $25,000, so $25,000 of the distributions is not income, because it does not exceed basis. The remaining $5,000 is gain from a sale of property, reported on Form 8949 and Schedule D, and basis ends the year at zero, because it cannot go below zero.
The owner who finds this out in March has no fix left for that year. The owner whose books show the distribution account running ahead of income in October can stop taking money out, or run more of it through payroll.
Money you lend the company gives you debt basis, which can absorb losses once stock basis is used up: the loss limit is stock basis plus the basis of the company's debt to you. It does not help with distributions: a distribution's taxability looks solely at stock basis, and distributions don't reduce loan basis.
Two traps follow. A bank loan you personally co-sign is not your loan to the company: co-signed loans aren't part of loan basis until you actually make a payment on one. And once losses have reduced debt basis, repaying that loan to you can be partly or fully taxable; later net income restores debt basis before it adds to stock basis. The loan ledger has to show both the balance owed and the basis left in it.
A loss that clears basis still has to pass three more tests, in this order: the at-risk limits, the passive activity loss limits and the excess business loss limit. Basis comes first, and it is the one the bookkeeping controls.
Rebuild it from the first year forward: the stock cost or first capital contribution, then each year's income, losses and distributions from the company's returns, in the order above. Each year's opening figure should equal the prior year's ending basis, so a single missing year breaks every year after it. Old bank statements prove the contributions and distributions the company's returns do not show.
Yes. If it still has earnings from the C years, distributions beyond the accumulated adjustments account can be taxed as dividends, and only non-dividend distributions reduce stock basis. The books then need that account tracked as well.
No. Basis is per shareholder: each spouse completes a separate Form 7203 even on a joint return, so the books need contributions, distributions and loans split by owner.
Hand the books over when keeping them costs more hours than the business can spare, or when they stop agreeing with the bank.
Excite Tax keeps these books; the return they feed is reviewed and signed by a licensed CPA at TBD CPA LLC.
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