Answers · S corporations
What Is Debt Basis in an S Corporation?
S corporation stock and debt basis cannot go below zero. Debt basis generally requires bona fide debt directly from the corporation to the shareholder.
This question is answered in full on the main page for it.
How it works
The rule, and what it turns on.
A shareholder guarantee of bank debt usually does not create debt basis until actual economic outlay, subject to fact-specific case law. Distributions reduce stock basis, not debt basis.
Example
Direct $30,000 shareholder loan may create debt basis; merely guaranteeing a $30,000 bank loan generally does not.
Common mistakes
What we see go wrong, and what we do instead.
- Counting guarantees as basis automatically.
- Using debt basis to shelter distributions.
A better approach
- Document bona fide direct shareholder loans and track debt-basis restoration.
Authority
Where this comes from, so you can check it.
IRC §§1366(d), 1367 and 1368; Form 7203 and instructions; IRS S Corporation Stock and Debt Basis guidance.
Relevant case law
Maloof v. Commissioner, 456 F.3d 645 (6th Cir. 2006) - a shareholder guarantee generally does not create S
corporation debt basis without actual economic outlay.
Selfe v. United States, 778 F.2d 769 (11th Cir. 1985) - fact-specific exception involving shareholder
guarantee/economic substance; not a general rule that guarantees create basis.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
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