Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000. For the current tax year, the entity has profits of $50,000. If the entity is a C corporation, the corporate profits have no effect on Carol's basis in her stock. However, if the entity is an S corporation, Carol's basis increases to $90,000 [$60,000 + (60% ´ $50,000)].

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This is because in an S corporation, the profits of the corporation flow through to the shareholders and increase their basis in their stock. In a C corporation, profits do not affect shareholders' basis in their stock.

Carol Is a 60% Owner of a Business Entity and Has