A calendar year S corporation reports an ordinary loss of $80,000 and a capital
ID: 2489238 • Letter: A
Question
A calendar year S corporation reports an ordinary loss of $80,000 and a capital loss of $20,000. Mei Freiberg owns 30% of the corporate stock and has a $24,000 basis in her stock. She has asked that you determine the amounts of the ordinary loss and capital loss, if any, that flow through to Freiberg.
Complete the tax memo below for the files, outlining your computations.
RE: Flow-Through of Losses
TAX FILE MEMORANDUM Date: December 3, 2015RE: Flow-Through of Losses
Freiberg's share of the operating loss is $24,000 , and her share of the capital loss is $6,000 . Since her basis in the stock is $24,000, only $24,000 is deductible. Thus, $? of the operating loss and $? of the capital loss is deducted currently by Freiberg.Explanation / Answer
If a shareholder’s basis is insufficient to allow the full use of the flow-through losses and there is more than one type of loss, the amount of each deductible flow-through loss is determined on a pro rata basis. Ms. Freiberg’s share of the operating loss is $24,000 ($80,000 × 30%) and of the capital loss is $6,000 ($20,000 × 30%), for a total share of losses of $30,000. Since her basis in the stock is $24,000, only $24,000 is deductible. Thus, $19,200 of the operating loss [($24,000/$30,000) × $24,000] and $4,800 of the capital loss [($6,000/$30,000) × $24,000] can be deducted currently by Ms. Freiberg. The unused losses ($4,800 operating loss; $1,200 capital loss) are carried forward to future years
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