05/23/2026
If you have an S Corp or LLC taxed as an S Corp, you are living dangerously without understanding this one thing... basis.
If you are reading this, have an S Corp, and have never heard of this or feel fuzzy about it... READ 📖
S Corporations and Partnerships are called "pass-through entities" in the tax code.
That means generally they report income, pay no income taxes, and pass the income for taxation to the business owners.
Just because both entities are called pass-throughs does not make them equal. They do share one thing in common though... basis.
Basis is like a pass-through entities customs check that says how much you can take with you before you need to leave things behind and/or pay some extra taxes.
So what is basis? 🤔
It is generally the sum of your contributions, your profits, your distributions, your losses, and eligible debt.
S Corps only provide owners debt basis when they personally make loans to the business. This is different than partnerships.
And where things go wrong most often...
You cannot afford to go into the red 🛑 here.
Red means losses get trapped and distributions get taxed as capital gains.
Buying assets using debt? Aka real estate... creates paper losses, reduces basis, and leads to traps.
If you loan money and use that debt basis to pass losses through... it reduces your basis in that loan.
When you pay yourself back... capital gains tax ✅️
Imagine you have a bunch of income in one business and you are counting on losses from your other... instead your tax preparer is telling you not only that your losses are trapped, but you have extra phantom income triggered by taking money out with no basis.
If you own an S Corp you MUST have a pulse on your basis.
