I'll be using hypothetical numbers to make this easier to visualize.
I purchased 2000 shares from an S-corporation for $4000 in December of 2014. I received $1000 in distributions for the shares (box 16 code D on the Schedule K-1). This represents 0.10% ownership of the company, which translates to +$2000 in the company income/loss (box 1 on K-1).
I see a lot of mumbo jumbo online regarding calculating your share cost basis to determine taxable amount. For my 2014 taxes, does this mean that I need to pay taxes on the full $2000 of the company income/loss, or does the amount I've received in distributions ($1000) affect the taxable amount?
The tax code seems to indicate that my cost basis affects the taxable amount, but I don't see how this makes sense. It seems to me that cost basis only applies to when I sell the stock. Then again, I don't see how paying more in taxes than distributions received makes sense either.