Emma owns 40% of Johnson, Inc., a corporation that elected to be treated as an S corporation that reported a net loss of $50,000 for the year.Emma acquired her stock on January 1 of the current year by investing $4,000 cash.In July, the corporation took out a bank loan for $25,000.How much of the loss can Emma deduct on her tax return for the year?
A)$0
B)$4,000
C)$9,000
D)$10,000

Question

Quizplus · Accepted Answer

Emma can deduct up to the amount of her basis in the S corporation. Her initial investment was $4,000, which establishes her basis. The bank loan does not increase her basis because, in an S corporation, only loans made directly from shareholders to the corporation can increase a shareholder's basis. Therefore, Emma can deduct $4,000 of the loss on her tax return for the year.

Emma Owns 40% of Johnson, Inc