1120-US: Distributions are not reducing the Shareholder's loan basis (FAQ)

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Question

Why aren't distributions reducing the Shareholder's loan basis?

Answer

Under IRC section 1367(a)(2), the basis of each shareholder's stock in an S Corporation is reduced (but not below zero) by the sum of the following items.

  1. Distributions
  2. Items of loss and deduction
  3. Non-separately computed loss
  4. Any expense not deducted by the corporation
  5. Shareholder's deduction for depletion for any oil and gas property

Under IRC section 1367(b)(2), adjustments in basis of indebtedness, if the amounts specified in items (2) through (5) above reduce the stock basis to zero, any excess is applied to reduce the shareholder's loan basis.

Item (1) for distributions is not mentioned in section 1367(b)(2) as a reduction to loan basis. Therefore, distributions only reduce stock basis.

Related topic: 1120-US: Shareholder basis calculations FAQs

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