[needhelpnow]

Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone’s personal tax return?

Answer: $1500

A taxpayer’s deduction for losses passed through from an S corporation is limited to the taxpayer’s basis. The taxpayers beginning basis of $5,000 is first reduced by distributions received. This leaves $1,500 of basis, so the taxpayer may only deduct $1,500 of the $2,000 loss.

I still do not understand how this makes sense. Can someone please assist? Thank you!

[thechapman]

You can't have a negative basis.

Passed - 2014

[needhelpnow]

Sigh, this makes sense as I read it again. Thank you for the hint!

[thechapman]

I wish I knew how to explain it better than that, but I believe you can only use that much loss. Once your basis is above zero, then you can use more.

Passed - 2014

[Author]

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