[Anonymous]

11. Brooke, Inc., a Subchapter S corporation, was organized on January 2, 20X1, with two equal

stockholders. Each stockholder 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, 20X1. How

much of this loss can each stockholder claim on his 20X1 tax return?

a. $ 5,000

b. $20,000

c. $45,000

d. $50,000

answer: 20,000

Can anyone please explain why the Brooke’s 60,000 loan did not increase the basis of the shareholders?

[Geshanyc]

Anna, Unlike LLCs, S-corp's regs do not have debt basis provisions which would otherwise increase shareholder basis if the LLC debt was recourse. They are trying to make you think here and remember the difference in basis comps of LLCs and S corps. Brook, Inc borrowed the money, not Shareholder's. S-Corps do however treat Shareholder loans as basis, hence the $15K increased basis. G'luck.

[Author]

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