Question

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $49,800 loss this year (year 1). Assume her stock basis is $11,920 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,480. In year 2, Bikes-R-Us reported ordinary income of $12,960.

1. What amount is Jessica allowed to deduct in year 1 and year 2?
2. What are her stock and debt bases in the corporation at the end of year 1?
3. What are her stock and debt bases in the corporation at the end of year 2?

Answer 1

Answer :

(1)

S corporation's loss allocated to Jessica = $49,800 x 1/3 = $16,600

Jessica's stock basis = $11,920

Jessica's debt basis = $3,480

Amount that Jessica is allowed to deduct in year 1 = $11,920 + $3,480 = $15,400

Amount that Jessica is allowed to deduct in year 2 = Balance amount = $16,600 - $15,400 = $1,200

(2)

Particulars	Amount
Jessica's stock basis at the beginning of Year 1	$11,920
Less : deduction of share of corporation's loss	(11,920)
Jessica's stock basis at the end of Year 1	$0

Particulars	Amount
Jessica's debt basis at the beginning of Year 1	$3,480
Less : deduction of share of corporation's loss	(3,480)
Jessica's debt basis at the end of Year 1	$0

(3)

Jessica's share in corporation's ordinary income = $12,960 x 1/3 = $4,320.

The above share in corporation's ordinary income will increase Jessica's debt basis to $3,480 and her stock basis to $840

Particulars	Amount
Jessica's stock basis at the beginning of Year 2	$0
Add : Share in corporation's ordinary income	$840
Less : deduction of share of corporation's loss	(840)
Jessica's stock basis at the end of Year 2	$0

Particulars	Amount
Jessica's debt basis at the beginning of Year 2	$0
Add : Share in corporation's ordinary income	$3,480
Less : deduction of share of corporation's loss	(360)
Jessica's debt basis at the end of Year 2	$3,120