Many S-corp owners are mystified by the tax terms related to their business. So let's talk about two of those tricky terms: "capital" and "basis".

What is the "capital" on a balance sheet?

First, what is capital? Capital refers to the amount that a corporation's owners have invested.

Let's say that when you first set up your S-corp, you contributed $5,000 and received stock (or an ownership share) in return. The company got to use that $5,000 for operations, and you got a $5,000 capital account. The starting amount in your capital account then gets adjusted up or down for income and losses, respectively. The adjusted number at any point in time is your adjusted stock basis on that date.

What is the "basis" on a balance sheet?

Now what about your tax basis? Tax basis is the total of your adjusted stock basis (which we just defined) and your loan basis. Loan basis is created when you loan money to the company. Continuing with our example, if you loan your company $3,500, you now have tax basis of $8,500 ($5,000 adjusted stock basis plus $3,500 loan basis).

Why is it important to know the basis and capital?

From the business owner perspective, knowing the basis gives you a big picture idea of the financial health of your company.

Additionally, when you go to sell your business, you're going to need to know how much you have personally put in to the company.

From the tax perspective, your basis is absolutely necessary when you prepare your income tax return. This is especially the case when your S-corp reports a loss or you want to distribute company money to yourself.

If you would like to know more about harnessing the information from your company's balance sheet, click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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