S Corporation Basis

In order to deduct S corporation losses, you need basis in your stock. How do you get basis? Stock basis is increased by cash or property contributions, ordinary business income, and any other items of separately stated income. Stock basis is decreased by distributions, nondeductible expenses, ordinary income business losses, and other deductible expenses. You can also increase basis by loaning funds directly to the S corporation with a formal bona fide debt instrument. Whether or not it is a bona fide debt is subject to IRS scrutiny.  Loan basis is very difficult to establish. A better way would be to contribute cash to the S corporation before year end if you feel you need more basis to deduct losses or avoid capital gains. If distributions exceed basis, then you have to report a capital gain because basis cannot be reduced below 0. If losses exceed basis, then the losses are suspended until future years when the basis is restored.