MGMT 127B Lecture Notes - Lecture 9: Retained Earnings, S Corporation, Ordinary Income
Document Summary
Everything above was based on the assumption that you are profitable, but you can still be unprofitable too. S corp analysis: the three things you need to look at. Income: stock basis = initial contribution +/- % income - received distributions. Initial contribution is the cost you initially pay to get ownership rights of the company. So the dividends you get are not income because you are taxed on the flow through total not on the actual cash. They are similar to bonds (both written interest bearing payment documents) and their basis is the amount at which you originally loan to someone. When you get paid back the money you lent, it is just recovery of capital (recovery of basis) A shareholder calculates his stock investment basis in 3 steps according to the following formula: Initial basis +/- share of income or loss - received distributions.
