Shelley owns a 25% interest in a qualifying S corporation. Shelley's basis in the stock was $15,000 at the beginning of the year. Shelley made no capital contributions and received no distributions during the year. Shelley loaned the S corporation $20,000 this year. The S corporation incurred a $160,000 ordinary loss this year.a.What are the amounts of Shelley's deduction and carryover of the unused loss for the year?b.What is the amount of Shelley's basis in the stock at the end of year one?c.If the S Corporation earned net income of $200,000 in year two, what is the amount of Shelley's stock basis at the end of year two?
What will be an ideal response?
a. and b.
| Basis in stock at the beginning of year one | $15,000 |
| Minus: Ordinary loss applied against stock basis | ( 15,000) |
| Basis in stock after ordinary loss absorption | $ 0 |
| Basis in loan | $20,000 |
| Minus: Ordinary loss applied against loan basis | ( 20,000) |
| Basis in loan after ordinary loss absorption | $ 0 |
| Share of ordinary loss | $40,000 |
| Minus: Deduction year one ($15,000 + $20,000 = $35,000) | ( 35,000) |
| Carryover of ordinary loss to year two | $ 5,000 |
| Basis in stock on January 1, year two | $ 0 |
| Plus: Ordinary income [$200,000 × 0.25] | 50,000 |
| Basis in stock after ordinary income | $50,000 |
| Minus: Loss carryover | ( 5,000) |
| Minus: restoration of loan basis | ( 20,000) |
| Basis in stock on December 31, year two | $ 25,000 |
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