S Corp Basis

[apsund]

I am a CPA but I don't claim to be a tax expert. I am helping a friend out who has an S Corp that has incurred losses in the last couple years. Now I know that S Corp income/loss flows thru to the individual return, but only to the extent that he has basis in the S Corp. He has had to loan money to the company and I know that increases his basis.

As I look thru the basis calculation, it looks like all the adjustments would flow thru stockholder's equity on the book side. So my question is - if an S Corp records tax depreciation on it's books, why wouldn't the basis in the company equal book stockholder's equity? Under what situations would it not? And if an S Corp did not track basis, how would someone be able to reasonably go back and calculate basis if the company was in business for many years? Thanks.

[Snaggletooth]

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For starters, here are a few reasons why basis would differ from "book value."

1) A stockholder contributes property (instead of cash) in exchange for capital stock.
2) Downward adjustments in basis have been limited, whereas book value deficits continue.
3) Stockholder acquires "multiple blocks" of stock at different prices.
4) Stock is acquired through donation rather than purchase.
5) GAAP value is impacted by purchases of Treasury stock, recapitalization, or reorganization.
6) Stock basis can sometimes temporarily borrow from Loan basis to allow reductions due to distributions.

Basis must be calculated year-by-year. Chapter 15 of the Small Business Edition has a worksheet that calculates basis. I believe there is a similar worksheet in the Deluxe Edition as well.