S-Corp distribution in excess of basis

[Gretel]

I don't seem to find good information on what happens to basis for a taxable distribution AFTER it has been correctly reported on the 1040 as Cap.Gain.

Does paying taxes on a distribution in excess of basis increase basis? I don't think so but it doesn't seem to be fair.

[Gretel]

Found answer in old thread

Bees Knees Bees Knees is offline
Senior Member
Join Date
May 2005
Posts
5,409
Default
That is kind of what happens.

Actually, basis can never go in the hole. So what happens is say you start with $1,000 basis. You take $1,200 in distributions.

$1,000 of the distribution reduces basis to zero.
$200 of the distribution is a capital gain on Schedule D.

The $200 gain portion of the distribution does nothing to basis as it is already at zero. Basis after the $1,200 distribution stays at zero. So if this happened in 2006, your basis as of 1/1/2007 begins at zero.