When it comes to determining loss limitations and taxability of distributions, shareholders in an S corporation must understand both stock basis and debt basis. Here's a summary:

Stock Basis:

• The corporation's stock represents the shareholder's investment.
• The corporation's income, losses, distributions, and other factors determine the annual adjustment.
• The shareholder's stock basis is the maximum amount of losses and deductions that can be claimed.
• As long as they don't exceed the stock basis, non-dividend distributions are tax-exempt.

Debt Basis:

• Refers to the basis of loans made by shareholders to the S corporation.
• In the event that the stock basis becomes zero, the shareholder is able to use the debt basis to claim more losses.
• When the corporation generates income in subsequent years, it restores the debt basis first.
• The taxability of distributions remains unchanged.

To determine the ability to claim losses and the tax implications of distributions, the shareholder must carefully track both stock and debt basis.