Sam owns stock in an S-Corporation. Sam\'s share of the corporation\'s loss for

Question

Sam owns stock in an S-Corporation. Sam's share of the corporation's loss for the year is $25,000. He receives a k-1 which contains this amount. His adjusted basis in the corporations stock is $10,000. In addition, Sam has a loan outstanding to the corporation in the amount of $13,000.

a) what amount, if any, is Sam entitled to deduct with respect to the loss?

b)If any amount of the loss cannot be deducted this year, what happens to it?

c) What is Sam's stock basis and debt basis at the end of the year?

d) If Sam's share of the S Corporation profits next year is $19,000, what are the tax consequences to Sam?

Explanation / Answer

SAM'S SHARE OF LOSS FOR CURRENT YEAR IN S-CORPORATION $25000

STOCK BASIS $10000

DEBT BASIS $13000

A) BASIS CAN NEVER BE NEGATIVE OR REDUCED BELOW ZERO, THEREFORE LOSS FOR CURRENT YEAR CAN BE ADJUSTED UPTO BALANCE AVAILABLE THAT IS $10000 FROM STOCK BASIS AND $ 13000 FROM DEBT BASIS.

B) THE AMOUNT OF LOSS WHICH IS NOT ADJUSTED IN BOTH STOCK BASIS AS WELL AS DEBT BASIS FULLY IN CURRENT YEAR IS CARRIED FORWARD TO FUTURE YEAR.

C) SAM'S STOCK BASIS AT THE END OF THE YEAR IS ZERO. AS IT CANNOT BE LESS THAN ZERO THEREFORE LOSS ADJUSTED UPTO AMOUNT AVAILABLE THAT IS $10000.

SAM'S DEBT BASIS AT YEAR END IS ZERO.AS IT CANNOT BE LESS THAN ZERO THEREFORE LOSS ADJUSTED UPTO AMOUNT AVAILABLE THAT IS 13000. BALANCE LOSS IS CARRIED FORWARD TO FUTURE YEAR.

D) IN NEXT YEAR SAM'S PROFIT SHARE IS $19000 WHICH IS UTILIZED TO RESTORE THE DEBT BASIS BY $13000 . BALANCE PROFIT WILL RESTORE STOCK BASIS BY $6000 WHICH IS FURTHER ADJUSTED FOR CARRIED FORWARD LOSS $2000. TAX IS COMPUTED ON $4000

STATEMENT SHOWING TAXABLE STOCK BASIS

STOCK BASIS AT BEGINING OF YEAR $ 0

ADD: CURRENT YEAR PROFIT SHARE $ 19000

LESS: DEBT BASIS RESTORED $-13000

LESS: PREVIOUS YEARCARRIED FORWARD $-2000

LOSS ADJUSTED

BALANCE FOR TAX PURPOSE $4000

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