Small Business Tax Savings Podcast

Partnership vs. S Corp | How Basis Can Make or Break Your Tax Bill

Jul 23, 2025
Taking money out of your business isn't always tax-free, and understanding your basis is key to avoiding surprises. A business owner's shocking $7K capital gains tax illustrates the importance of tracking basis accurately. The podcast discusses how partnerships and S Corps calculate basis differently, with partnerships including debt. Common miscalculations stem from poor bookkeeping and switching accountants, leading to costly errors. Listeners gain practical tips on annual tracking and better management of distributions.
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INSIGHT

What Is Basis and Why It Matters

  • Basis represents an owner's investment for tax purposes and determines tax-free withdrawal limits.
  • Taking distributions beyond basis triggers taxable capital gains.
ANECDOTE

Client's $7K Surprise Tax Bill

  • A client took money out thinking it was tax-free but ended up with a $7,000 surprise capital gains tax bill.
  • This happened because their basis had quietly eroded.
INSIGHT

Calculating Partnership Basis

  • Partnership basis equals initial investment plus income, contributions, minus losses and distributions, plus liabilities.
  • Basis is a rolling calculation carried forward year after year.
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