Let’s talk “basis”—not the kind in bananas, but the tax kind that determines whether you can deduct losses, take out cash, or make big tax moves in your business.
Thanks to the One Big Beautiful Bill (OBBB), the rules just changed for S Corporations and partnerships. Here’s what every SMB owner (and their accountant) needs to know.

What Is “Basis” and Why Does It Matter?

Basis is your running investment in your business for tax purposes.
It goes up when you put in cash or assets, and down when you take out money or deduct losses.
Why it matters: If you don’t have enough basis, you can’t deduct losses—or take cash out tax-free.
(Cue the sad trombone—and a possible surprise tax bill.)

What Did the OBBB Change? (With Citations)

OBBB Section 70451–70453 (amending IRC §§ 1366, 1367, 1368 for S Corps, and §§ 704, 705, 752 for partnerships)

Key changes effective for tax years after December 31, 2025:

1. Tighter Rules for Loans to S Corporations

Old law: Shareholders could “increase basis” by lending money directly to their S-Corp—sometimes even with backdated or informal loans.
New law ([OBBB §70451–70453, amending IRC §1366(d)]):
- Only bona fide, properly documented loans increase basis.
- “Back-to-back” or “arranged” loans (like borrowing money elsewhere and funneling it to the S-Corp for a basis bump) now require strict proof and timely paperwork.
- Trap: No more boosting basis just before year-end to deduct losses—paperwork and timing matter!

2. Partnership Liabilities: Who’s Really “At Risk”?

Old law: Partners could sometimes count partnership-level (or even related-party) loans toward their own basis.
New law ([OBBB §70452, amending IRC §§704, 705, 752]):
- Only debts for which you’re personally liable count toward basis, unless you can show true economic risk.
- Related-party loans and guarantees: Must now meet stricter IRS standards—sham or circular loans don’t cut it.

3. Clearer At-Risk Rules for Losses and Distributions

OBBB amends the “at-risk” provisions ([OBBB §70453, amending IRC §465]):
- Losses and distributions must be traced to genuine investment and risk—no more creative accounting to squeeze out more deductions.
- Distributions that exceed your basis? Now more likely to trigger taxable gain.

What Does This Mean for SMB Owners?

Track your basis every year—no more “fudge it at tax time.”
Formalize loans: If you lend money to your S-Corp or partnership, use real, signed promissory notes, with terms and proof of payments.
Be honest about guarantees and at-risk: Only true, out-of-pocket risk boosts your basis.
Don’t try “basis boosts” with last-minute or circular loans—the IRS is watching (and the penalties are real).
If your basis is low, you may be limited on deductions and can owe tax on distributions—even if you’re just taking out your own money!

Common Pitfalls

Taking a distribution that exceeds your basis (now more likely to trigger tax).
Deducting more losses than you’re allowed (leading to IRS letters or denied refunds).
Not tracking basis for each shareholder or partner—everyone’s number is different!

Bottom Line: Basis Isn’t Boring (It’s Your Ticket to Big Tax Savings)

The new OBBB basis rules are strict—but with clear records and a modern app like Hedgi, you’ll avoid trouble and keep more of what you earn.

Have a tricky basis situation, a loan to your business, or just want a “basis checkup”? Drop a question or DM us. Don’t get caught out in the cold when it’s time to take a distribution—let Hedgi keep you tax-savvy and audit-ready!