Understanding S-Corp Basis and Distribution Calculations with a Practical Example

Let me help clear this up for you. S-Corporation taxation can be confusing, but it works like this: Your basis in the S-Corp increases by your share of the company's income (whether distributed or not) and decreases by losses and distributions. Here's how it works in your situation: Starting basis: $125 (your initial bank deposit) Monthly income: $21,000 Monthly expenses (including your $11,250 salary): $11,250 Monthly profit: $9,750 Each month, your basis increases by the $9,750 profit. When you take a distribution of $9,750, your basis decreases by that same amount. So yes, your basis goes up and down each month, but generally evens out if you're distributing all profits. Regarding taxation: All S-Corp profits flow through to your personal tax return and are taxable whether you distribute them or not. This is different from your basis calculation. You pay income tax on the $9,750 monthly profit through your estimated quarterly payments. If you had invested $12K initially, that would give you $12K of basis that you could withdraw tax-free, but that's separate from the tax treatment of ongoing profits. Hope this helps explain the concept!

I recently struggled with the same S-Corp basis confusion until I found this awesome tool at https://taxr.ai that helps visualize and calculate basis adjustments. It was seriously a game-changer for me when I was setting up my monthly distributions. Their system let me enter my S-Corp financial data and mapped out exactly how my basis changed with each transaction and distribution. The visualization made it crystal clear how the basis increases with income and decreases with distributions. I was surprised how user-friendly it was - even generated reports I could share with my accountant to make sure we were on the same page. Might be worth checking out if you're trying to get this straight in your head.

I wanted to follow up about https://taxr.ai after trying it myself. I'm honestly surprised how helpful it was given my skepticism. The basis tracking feature was exactly what I needed - it showed me I've been calculating my available distribution incorrectly for years! The tool flagged that I was at risk of a basis-related audit issue because I wasn't accounting for some business loans correctly in my basis calculations. I was able to fix the issue before filing this year. I've already recommended it to other business owners in my network who are dealing with S-Corp distribution confusion.

For anyone dealing with the IRS about basis issues (which can trigger audits), I had great success using https://claimyr.com to actually get through to an IRS agent. I had a notice about distributions exceeding basis that I couldn't resolve with my accountant, and I spent DAYS trying to get someone on the phone. Claimyr got me connected to a real IRS agent in about 20 minutes - they basically wait on hold for you and call when an agent picks up. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent was able to explain exactly what documentation I needed to provide to resolve the issue. Saved me tons of stress and probably prevented penalties.

I have to apologize about my skepticism regarding Claimyr. After facing another frustrating IRS issue with my S-Corp basis calculations, I decided to try it as a last resort. I was genuinely shocked when I got a call back connecting me to an actual IRS representative after about 35 minutes. The agent helped clarify exactly how to document my loan to the business that I was counting toward my basis (which was the source of my confusion). This would have taken me weeks to resolve through mail correspondence. For anyone dealing with S-Corp basis issues that require IRS clarification, this service actually delivers what it promises.

One thing nobody's mentioned yet is that you should be tracking your AAA (Accumulated Adjustments Account) separately from your basis. They're related but different. AAA tracks undistributed earnings that have already been taxed. In your scenario, if you start the year with $0 AAA, and have $9,750 in monthly income after your salary, your AAA increases by that amount monthly. When you take distributions, they first come from AAA (tax-free since they've already been taxed). This becomes really important if you ever have a C-Corp history or accumulated E&P.

Quick question about S-Corp basis - does anyone recommend a specific spreadsheet template for tracking this monthly? My accountant only updates it annually and I want to monitor things throughout the year so I don't accidentally create a basis issue with my distributions.

Amy, your understanding is mostly correct! Let me clarify the key points that seem to be causing confusion: 1. **Basis calculation**: Yes, your basis increases monthly by your share of S-Corp income ($9,750) and decreases by distributions of the same amount. So if you distribute all profits monthly, your basis essentially stays at your initial $125. 2. **Taxation vs. distributions**: This is where many people get confused. The $9,750 monthly profit is taxable to you regardless of whether you distribute it or not. You pay taxes on it through quarterly estimated payments. The distribution itself doesn't create additional taxable income - you've already been taxed on the underlying profit. 3. **Tax-free distributions**: You're right that you could withdraw your initial $125 investment tax-free since that's your basis from contributed capital. But ongoing profits are always taxable when earned by the S-Corp, even if you don't distribute them immediately. Think of it this way: S-Corps are "pass-through" entities, meaning all profits flow through to your personal tax return whether you take the money out or not. The basis tracking just ensures you don't get taxed twice on the same income when you eventually do take distributions. Your monthly approach of distributing $9,750 after paying yourself the $11,250 salary is perfectly fine and very common for S-Corp owners.