Tax
Basis Tracking
Recording and updating each owner's adjusted basis in a passthrough entity, necessary to determine taxable gain on distributions, deductible losses, and exit-event tax.
Basis is the owner's after-tax investment in the business: cash contributed, plus allocated income (taxed when earned, regardless of distribution), minus distributions, plus the owner's share of entity debt.
Distributions exceeding basis trigger capital gain, even though no economic event occurred. Losses can be deducted only to the extent of basis.
Many SMB owners don't track basis until they sell, take a large distribution, or experience a loss year, by which time the records are gone and rebuilding basis is painful or impossible.
Common pitfalls
- Not updating basis annually as income is allocated; every K-1 changes basis
- Treating loans from the owner as capital contributions (or vice versa); they have different basis effects
- Failing to track separate inside basis (entity's basis in its assets) vs outside basis (owner's basis in the entity); both matter at sale
Related service
See tax and CPA servicesRelated terms
Have a Basis Tracking situation in your business?
Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.