Question

essica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Assume her stock basis is $10,000 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. (Leave no answer blank. Enter zero if applicable.) Required: What amount is Jessica allowed to deduct in year 1 and year 2? What are her stock and debt bases in the corporation at the end of year 1? What are her stock and debt bases in the corporation at the end of year 2?

Answer 1

ANSWER

Corporation's loss allocated to Jessica = $45,000 < 1/3 = $15000 Jessica's stock basis at the beginning of the year = $10,000 Jessica's debt basis = $3,000 Therefore, Amount that Jessica is allowed to deduct in Year 1 = $10,000 (stock basis) + $3,000 (debt basis) = $13,000 Jessica's stock basis and debt basis at the beginning of Year 1 is absorbed to cover her share of the corporation's loss. Therefore, Jessica's stock basis at the end of the Year 1 = $0 Jessica's debt basis at the end of Year 1 = $0 Jessica's share in the corporation's ordinary income = $12,000 1/3 = $4,000 The share in the corporation's income will increase Jessica's debt basis to $3,000 and her stock basis to $1,000 at the end of year 2. The increase in the stock basis and the debt basis will be first used to absorb the loss carried forward from Year 1. Loss carried forward from Year 1 = $2,000 ($15,000 - $13,000). The loss carried forward from Year 1 will absorb Jessica's stock basis of $1,000 and her debt basis of $1,000. Therefore, Jessica's stock basis at the end of Year 2 = $1,000 - $1,000 = $0 Jessica's debt basis at the end of Year 2 = $3,000 - $1,000 = $2,000

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