[scdcpa]

Wiley Question –

here is the Question:

Brooke, Inc., an S corporation, was organized on January 2, 2010, with two equal shareholders. Each shareholder invested $5,000 in Brooke’s capital stock, and each loaned $15,000 to the corporation. Brooke then borrowed $60,000 from a bank for working capital. Brooke sustained an operating loss of $90,000 for the year ended December 31, 2010. If each shareholder materially participates in the corporation’s business, how much loss can each shareholder claim on his 2010 income tax return?

A. $ 5,000

B. $20,000

C. $45,000

D. $50,000

Answer B is correct. An S corporation loss is passed through to shareholders and is deductible to the extent of a shareholder’s basis for stock plus the basis for any debt owed the shareholder by the corporation. Here, each shareholder’s allocated loss of $45,000 ($90,000/2) is deductible to the extent of stock basis of $5,000 plus debt basis of $15,000, or $20,000. The remainder of the loss ($25,000 for each shareholder) can be carried forward indefinitely by each shareholder and deducted when there is basis for stock or debt to absorb it.

I could understand why the $60,000 borrowed did not increase each shareholders basis.

I got $5000+$15000+$30000=$50000

half of loss sustained 90000/2 = $45,000 each can claim as loss on the tax return.

Please help….

[jeff]

A loss can't take the basis below zero.

In this case – the corporation doesn't owe the shareholders – it owes a third party, so it doesn't affect shareholder basis.

5 + 15 loaned to Corp = $20k basis.

$45k loss to each shareholder…takes basis to zero…$25k carried forward.

I hope that helps a little.

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Jeff Elliott, CPA (KS)
NINJA CPA | NINJA CMA | NINJA CPE | Another71

[Author]

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