Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a

Question

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Assume her stock basis is $10,000 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us, reported ordinary income of $12,000

a. What amount is Jessica allowed to deduct in year 1?

b. What are her stock and debt bases in the corporation at the end of year 1?

c. What are her stock and debt bases in the corporation at the end of year 2?

Explanation / Answer

Answer:a &b Jessica is allocated $15,000 of loss ($45,000 x 1/3). She is allowed to deduct $10,000 of the loss which reduces her stock basis to $0. She then can deduct an additional $3,000 of the loss, reducing her debt basis to $0. She has a suspended $2,000 ($15,000 - $10,000 - $3,000) loss at the end of year 1.

Answer:c In year 2, Jessica's $4,000 ($12,000 x 1/3) share of ordinary income restores Jessica's debt basis to $3,000 and then increases her stock basis to $1,000. Jessica can then deduct the $2,000 loss carry over first against her $1,000 stock basis and then her $3,000 debt basis, reducing her stock basis to $0 and her debt basis to $2,000

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