S Corp Distributions and Stock Basis
I'm confused about the relationship between distributions and the S corp stock basis. I have a S corp that has been profitable for the first 3 years but had a loss for 2006. In doing my personal taxes I came across something about my K-1 loss may be limited by my stock basis. I read the K-1 instructions and did the worksheet to figure my stock basis (as near as I could decipher the instructions). The net result is my loss in 2006 exceeds my stock basis at the end of 2006.
As I understand it, this means I can only take the amount of loss (on 2006 return) that would result in a stock basis of zero. Okay, that's fine, but elsewhere I read that distributions in excess of the stock basis are considered taxable???
I really don't get it. What is the connection between stock basis and taxes? When the S corp ends, is the stock basis used to calculate a gain based on the original cost of the stock? If I don't sell the S corp, just quit doing business, is it still a gain?