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From what I can gather from your question, if your take distribution from your business even when there is no profit, technically, either you would be reducing the "Retained Earnings" or in absence of that you would be depleting the capital.
I hope this helps...
Yes, that is correct. Tax basis is the original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value.
so can I get an example? We paid $225,000 for 1/2 ownership of a business. Over the years, we have had distributions due to making a profit each year. Let's say 50,000 each year for 4 years. Last year we did not make a profit, in fact we had a $2000 loss but we still took a 10,000 distribution. What effect does that have on my basis?
It would reduce your stock basis by $10,000.
I had become engaged in this question, as I took this as an probable effect of taking distribution even when there is a loss with probable effect on accounting and balance sheet. However, this is becoming a matter of tax expertize and therefore, I would opt out in your best interest so that other expert can assist you in better way. Hope to assist you in future..