S Corporation Shareholder Basis and Losses
Learn the decision pattern the exam can test, then apply it to a realistic taxpayer fact pattern.
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If an S Corporation has no accumulated earnings and profits from prior operations as a C Corporation, any amount distributed to a shareholder:
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A corporate bank loan guaranteed by a shareholder generally does not create debt basis until the shareholder makes an actual economic outlay.
A tax-practice scenario
A shareholder receives losses, makes a direct loan, and takes a distribution. Apply ordering and restore basis correctly.
Identify the taxpayer, entity, transaction, and tax period first. Write the controlling tests in order, apply only the relevant facts, and keep the reporting result separate from any planning recommendation.
Do not take this shortcut.
Combining stock and debt basis or using company-level equity as shareholder basis.
Turn the rule into recall.
Maintain separate stock- and debt-basis roll-forwards for every shareholder.
- ExplainState the governing distinction without notes.
- ApplyChange one fact in the scenario and predict the new result.
- RetrieveAnswer an unseen question, then review every option.
Official source and scope
This lesson follows the current PSI content outline and uses the IRS reference below for the underlying tax or practice framework. Always confirm current forms, instructions, thresholds, and effective dates before advising a taxpayer.
