The most important number for S corporation owners

If you own an S corporation, there is one number you absolutely must know.

And it isn’t revenue, profit, assets, equity, LTV, CAC, or anything else you typically talk about in business.

The most important number is your basis. This number doesn’t appear anywhere in your financial reports, but it matters for your taxes.

Basis the monetary value, strictly for tax purposes, of your ownership in your business. It serves as a baseline against which we compare losses, distributions, and sales of stock to see if you can get a tax break or avoid taxable income.

There are two kinds of basis you can have in your S corporation:

1. Stock basis The tax-relevant value of your equity in the business. This comes from money or assets you contribute to the business, along with the accumulation of profits (minus losses or distributions) over time.
2. Debt basis Money you personally loaned to the business. (Personally guaranteed debt does not count.) This requires some expectation of being repaid, along with interest (either explicitly stated or implied). Debt basis increases when the owner lends money to the business and decreases as the company pays down the debt, or when the business takes loses in excess of the owners’ stock basis.

The IRS takes knowing your basis seriously. A few kinds of events can trigger needing to know exactly what your basis is (more on this coming up later).

In fact, in 2022, the IRS started requiring S corporation owners to file Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, along with your individual income tax return.

If you have a tax professional (like me) preparing your S corporation tax returns, then she is probably already tracking your basis for you.