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4.

Stahl, an individual, owns 100% of Talon, an S corporation. At the beginning of the year, Stahl’s basis in Talon was $65,000. Talon reported the following items from operations during the current year:

Ordinary loss $10,000

Municipal interest incom $6,000

Long-term capital gain $4,000

Short-term capital loss $9,000

What was Stahl’s basis in Talon at year end?

a $50,000

b $55,000

c $56,000

d $61,000

Answer: C

An S corporation shareholder’s basis is increased by a shareholder’s share of income and gain, including non-taxable municipal bond interest, and decreased by the shareholder’s share of losses. Here, Stahl’s ownership percentage is 100% so Stahl’s basis is increased by 100% of Talon’s income and gain and reduced by 100% of Talon’s losses: $65,000 + $6,000 + $4,000 – $10,000 – $9,000 = $56,000.

But I thought that Cap Loss was limited to Cap Gain, then why is it getting added back in to this?!

Thank you for your help guys

[Anonymous]

You are confusing personal tax issues and S-Corp rules. The easiest way I remembered it, is an S-Corp is a pass-through entity. (IE- all of its income is put on a k-1 and given to the shareholders). Anyway, the S-corp has no idea what it's shareholders personal tax situation is, so you report all income and losses from the company and let the shareholder sort it out.

So, the s-corp reports everything, and as a shareholder, if this is my only income from LTCG& STCG, then yes, you are correct in that it is limited, but on MY personal tax return. The loss limitation is carried forward on MY own tax return, while the S-corp basis has already accounted for it.

As a side note, if the shareholder had made a short term sale and had a $10,000 gain, they would be able to take the entire STCL in the same year.

Hope this helps!

[needhelpnow]

Thank you!

[Author]

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