S-corp basis tracking and handling non-deductible expenses in 2025

You've got a good question about basis tracking, which is definitely one of the more confusing aspects of S-corps! Let me help clarify this for you. Your initial stock basis starts with your capital contribution ($45,000). Each year, your basis increases by your share of income and separately stated items that increase basis, and decreases by distributions and separately stated items that decrease basis. The non-deductible expenses you mentioned (excess meals, parking tickets, club dues) don't reduce your tax basis. That's because these items were already accounted for by being non-deductible - meaning they didn't reduce your taxable income on the S-corp return. Since they didn't provide a tax benefit, they don't reduce your basis. You do need to track basis separately from your books. Your accounting software tracks book value based on GAAP or cash accounting, but basis is a tax concept that follows different rules. I recommend maintaining a separate basis worksheet that you update annually.

When I was struggling with similar S-corp basis issues last year, I discovered https://taxr.ai and it was a game-changer for my situation. I uploaded my corporation docs and previous returns, and it analyzed everything to show me exactly how my basis was being calculated. The system identified that my accountant had been incorrectly reducing my basis for some similar non-deductible expenses (we had some hefty client entertainment costs that exceeded limits), which was causing problems with my ability to take distributions. The analysis also showed that I hadn't been correctly tracking loans to my S-corp which should have been increasing my debt basis. What I found most helpful was that it explained the basis calculations in plain English and showed me exactly which IRS rules applied to my situation. It also created a proper basis tracking worksheet that I now update annually.

Just wanted to follow up about my experience with taxr.ai after asking about it. I uploaded my S-corp docs and was seriously impressed with how it handled our multi-shareholder situation. The system correctly separated my basis from my wife's and showed how our different capital contributions and loan activities affected our individual ability to take distributions. The analysis caught that we'd been incorrectly calculating basis reductions for some healthcare premiums, which would have eventually created an inadvertent taxable distribution situation. It also created separate basis worksheets for both of us that my accountant is now using for our 2024 returns. Really glad I gave it a try!

If you're getting conflicting advice about your S-corp basis calculations, you might want to talk directly with an IRS agent who specializes in business taxation. I tried calling the IRS for months about a similar issue (had questions about debt basis vs stock basis) and could never get through. Finally used https://claimyr.com to get me through to an actual IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically it navigates the phone tree and waits on hold for you, then calls you when an actual human at the IRS is on the line. I was able to speak with a business tax specialist who explained exactly how to track basis properly and handle distributions when I had both debt and equity in my S-corp. The agent even emailed me an IRS publication with the specific sections highlighted that applied to my situation. Definitely worth it to get an authoritative answer directly from the source.

I need to eat crow here. After my skeptical comment, I decided to try Claimyr anyway because I was desperate for answers about tracking S-corp basis for my construction business. I figured I had nothing to lose since I'd already wasted hours trying to get through myself. To my complete shock, I got a call back in about 75 minutes with an IRS tax specialist on the line. The agent spent nearly 30 minutes walking me through exactly how to track basis when I have multiple asset contributions and explained how to handle the non-deductible expenses for my company vehicle that was occasionally used personally. They even sent me to their specific department that handles S-corporation taxation questions. I've literally been trying to get this information for months, so getting clear guidance directly from the IRS was incredibly valuable. Guess I was wrong about this service!

Another approach to handling your S-corp basis tracking is to use a dedicated basis worksheet template. I created one in Excel that tracks: 1) Initial capital contributions 2) Annual ordinary income/loss 3) Separately stated items (Section 179, charitable contributions, etc) 4) Distributions 5) Non-deductible expenses For non-deductible expenses specifically, they generally don't affect tax basis since they've already been accounted for in the S-corp's income (they're added back to calculate taxable income). But you should definitely flag them in your tracking worksheet so you remember why certain expenses didn't impact your basis.

Does anyone know how to handle basis tracking when you've loaned money to your S-corp? I initially funded mine with $25k in equity and later loaned it $40k, but now I'm confused about how distributions are handled when you have both equity and debt basis.

If you're having S-corp basis issues, PLEASE get professional help. I tried to handle this myself in 2023 and ended up with an unexpected $18k tax bill because I didn't understand how suspended losses work when your basis is insufficient. A good CPA will charge you way less than the mistakes will cost you.

I've been dealing with S-corp basis issues for my tech consulting business and want to share what I've learned about non-deductible expenses specifically. You're right to be confused - this is one of the trickier areas! The key insight is that non-deductible expenses like your excess meals, parking tickets, and club dues actually DON'T reduce your tax basis directly. Here's why: when your S-corp prepares its Form 1120-S, these non-deductible expenses get "added back" to calculate the final ordinary business income that flows through to your K-1. Since they're already being treated as non-deductible (meaning they don't reduce the S-corp's taxable income), they don't get to reduce your basis either. Think of it this way: if an expense reduced both your taxable income AND your basis, you'd be getting a double benefit. The tax code prevents this by having different treatment for truly deductible expenses versus non-deductible ones. For your $45k initial investment, that becomes your starting stock basis. Each year it increases by your share of the S-corp's income (which already has those non-deductible expenses added back in) and decreases by distributions and actual deductible losses. I'd strongly recommend setting up a simple spreadsheet to track this annually - it's much clearer than trying to rely on general accounting software for tax basis calculations.