S Corporation Stock Basis vs Debt Basis: Why Are There Two?
Track stock basis and debt basis separately because the rules do not treat them as one interchangeable number.
Stock basis
Stock basis changes for contributions, pass-through income, distributions, losses, and other pass-through items under applicable ordering rules.
Debt basis
Debt basis generally arises from qualifying indebtedness of the S corporation directly to the shareholder.
Guarantees
A third-party bank loan merely guaranteed by the shareholder does not automatically create debt basis before the shareholder makes a qualifying payment under applicable rules.
Losses
Loss deductions are limited by available basis, and ordering between stock basis and debt basis matters.
Basis restoration
Later income can restore basis under ordering rules. Track suspended losses carefully.
The takeaway
S corporation stock basis and debt basis are related but not interchangeable.
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FAQ
Does guaranteeing a bank loan create debt basis?
Generally not by itself.
Can losses use debt basis?
Potentially, after applicable stock-basis rules.
Do distributions reduce debt basis the same way as stock basis?
No. Apply the specific ordering rules.