Question

Jessica is a one-third owner in Bikes-R-Us, an Scorporation that experienced a $47,400 loss this year (year 1). Assume her stock basis is $10,960 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,240. In year 2, Bikes-R-Us reported ordinary income of $12,480. (Leave no answer blank. Enter zero if applicable.) Required: a. What amount is Jessica allowed to deduct in year 1 and year 2? b. What are her stock and debt bases in the corporation at the end of year 1? c. What are her stock and debt bases in the corporation at the end of year 2? Year 1 4,840 Year 2 1,600 s $ a. Deductible amount b-c. Stock basis Debt basis

Answer 1

Ans 1

The loss allocated of the corporation for Jessica is

1/3 * 47,400 = $15,800.

The stock basis is $10,960.

The loss which can be deducted is $10,960 equal to her stock basis.

Now the loss left after deduction is $4,840. From this $3,240 further loss is allowed to be deducted which reduces her stock basis as 0. So now the loss left $1,600 can be suspended for the future, which can be absorbed when there is the additional stock basis.

Year 2 Year 1 a Deductible Amount 14,200 1,600

Ans b

The debt basis is 0 and there is 0 stock basis as all is absorbed in losses incurred by the corporation

c)

In year 2 the income is $12,480 out of which Jessica share is 12,480 / 3 = $4,160. So this increases her debt basis first by $3,240 and the stock basis by $920. Now she will be able to absorb $1,600 first from her stock basis i.e $920 and then from the debt basis i.e. $680. So at the end of year 2 the stock bais is 0 and the debt basis is $2,560.

Year 2 1,600 Year 1 a Deductible Amount 14,200 b-c. Stock basis Debt basis 2,560

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