Updated October 16, 2026. Quick answer: Box 16 of Schedule K-1 (Form 1120-S) lists items that change a shareholder’s stock basis, and codes A through F cover tax-exempt income, nondeductible expenses, distributions, loan repayments and foreign taxes. The 2025 instructions say “You are responsible for keeping the information needed to figure the basis of your stock in the corporation.” Distributions are the code to watch, because those above basis are taxed.
What box 16 reports
On the form, line 16 of Part III is labelled “Items affecting shareholder basis”. Each item is identified by a code, and the instructions treat each code on its own. This page covers the shareholder’s side of a K-1 you received. Every other box is set out on the Schedule K-1 (Form 1120-S) boxes overview.
“Schedule K-1 provides information to help you figure your stock basis at the end of each corporate tax year.” “The basis of your stock is generally figured at the end of the corporation’s tax year.”
Every box 16 code and what to do with it
The table follows the instructions code by code. Codes A and B raise basis, code C lowers it, and code D has its own rule when distributions are larger than basis.
| Code | What it is, as printed | What the instructions say to do |
|---|---|---|
| A | “Tax-exempt interest income.” | “Individual shareholders include this amount on Form 1040 or 1040-SR, line 2a.” “Generally, you must increase the basis of your stock by this amount.” |
| B | “Other tax-exempt income.” | “Generally, you must increase the basis of your stock by the amount shown, but don’t include it in income on your tax return.” |
| C | “Nondeductible expenses.” | “The nondeductible expenses paid or incurred by the corporation aren’t deductible on your tax return.” “Generally, you must decrease the basis of your stock by this amount.” |
| D | “Distributions.” | “Reduce the basis of your stock (as explained earlier) by distributions, not reported on Form 1099-DIV, of property or money.” |
| E | “Repayment of loans from shareholders.” | “If these payments are made on a loan with a reduced basis, the repayments must be allocated in part to a return of your basis in the loan and in part to the receipt of income.” |
| F | “Foreign taxes paid or accrued.” | “Report this amount in column (a) of Form 7203, Part III, line 46” “Do not use this amount to complete your Form 1116.” |
Distributions above basis are capital gain
This is the rule that makes box 16 a decision point. “If these distributions exceed the basis of your stock, the excess is treated as capital gain from the sale or exchange of property and is reported on Form 8949 and Schedule D (Form 1040).”
Distributions are also tracked separately from the K-1 income figures. “Schedule K-1 doesn’t show actual dividend distributions the corporation made to you.” Form 8949 is covered on the Form 8949 page and Schedule D on the Schedule D page.
Illustration computed here, not an IRS example: suppose stock basis after the increases for the year is $50,000 and box 16 code D shows distributions of $60,000 in total. The excess over basis is $60,000 minus $50,000 which is $10,000 of excess, and the instruction above treats that $10,000 amount as capital gain. The remaining $50,000 amount reduces basis to zero.
How stock basis is adjusted each year
The instructions list the steps in order. “The basis of your stock (generally, its cost) is adjusted annually as follows and, except as noted, in the order listed.”
| Step | As printed |
|---|---|
| 1. Increase | “Basis is increased by (a) all income (including tax-exempt income) reported on Schedule K-1, and (b) the excess of the deduction for depletion (other than oil and gas depletion) over the basis of the property subject to depletion.” |
| 2. Decrease for distributions | “Basis is decreased (but not below zero) by (a) property distributions (including cash) made by the corporation reported in box 16, code D, of Schedule K-1, minus (b) the amount of such distributions in excess of the basis in your stock.” |
| 3. Decrease for nondeductible expenses | “Basis is decreased (but not below zero) by (a) nondeductible expenses; and (b) the depletion deduction for any oil and gas property held by the corporation, but only to the extent your share of the property’s adjusted basis exceeds that deduction.” |
| 4. Decrease for losses and deductions | “Basis is decreased (but not below zero) by all losses and deductions reported on Schedule K-1.” |
Each shareholder uses a worksheet for this. “You should generally use Form 7203” to “figure your aggregate stock and debt basis.” “See the Instructions for Form 7203 for more details.”
Loan basis and code E
A shareholder who has lent money to the corporation has a second basis. “The basis of your loans to the corporation is generally the balance the corporation owes you, adjusted for any reductions and restorations of loan basis”.
Two cautions apply. “Distributions don’t reduce loan basis”, and “Loans that a shareholder guarantees or co-signs aren’t part of a shareholder’s loan basis.”
Code E covers repayment: “See Regulations section 1.1367-2 for information on reduction in basis of a loan and restoration in basis of a loan with a reduced basis.”
Code A and code F: tax-exempt interest and foreign taxes
Code A is reported even though it is not taxed. “Report on your return, as an item of information, your share of the tax-exempt interest received or accrued by the corporation during the year.” Interest income in general is explained on the 1099-INT box 1 page.
Code F is a basis item, not a credit input: “See Schedule K-3 to complete your Form 1116.” The credit is covered on the Form 1116 page.
Basis is the first limit on losses
The instructions list four limits and put them in a fixed order: “These limitations and the order in which you must apply them are as follows: the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.” The amounts printed in Part III are before any of them. “The amounts shown in boxes 1 through 17 reflect your share of income, loss, deductions, credits, and other items from corporate business or rental activities without reference to limitations on losses, credits, or other items”.
Basis is the shareholder’s own job to track. “Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.” “You are responsible for keeping the information needed to figure the basis of your stock in the corporation.”
The statute is cited: “Generally, the deduction for your share of aggregate losses and deductions reported on Schedule K-1 is limited to the basis of your stock and loans from you to the corporation.”
Other K-1 pages on this site
The partnership version of this form is read on the Schedule K-1 (Form 1065) boxes page. Estates and trusts receive a third version, covered on the estates Schedule K-1 page.
Which revision applies
The edition read for this page is the 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S) and the 2025 Schedule K-1 (Form 1120-S) itself, which are the revisions irs.gov served when they were read on 2026-10-16. Check the revision printed on the Schedule K-1 you received and the matching instructions, because a later edition can change the box layout, the code letters and the reporting lines.
Common mistakes
- Treating distributions as always tax free. The instructions say that if code D distributions exceed the basis of the stock, the excess is treated as capital gain and reported on Form 8949 and Schedule D.
- Deducting a loss without checking basis. The instructions say the deduction for aggregate losses and deductions is limited to the basis of stock and loans, and basis is the first limit in the stated order.
- Using the code F amount on Form 1116. The instructions say to report it in column (a) of Form 7203, Part III, and to use Schedule K-3 to complete Form 1116.
Related: Form 8949 sales of capital assets, Schedule D (Form 1040), Form 1116 foreign tax credit, 1099-INT box 1 interest income, and 1099-DIV box 1a and 1b dividends.
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S corporation stock basis and distribution decisions
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Answer againSources
- 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S): https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
- Schedule K-1 (Form 1120-S) (2025), Shareholder’s Share of Income, Deductions, Credits, etc.: https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf
Read from the IRS documents linked above on October 16, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.