Jared owns 50% of an S corporation's stock. His basis in the stock was $50,000 on January 1, 2016. On February 1, 2016, the S corporation borrowed $30,000 from Jared, signing a formal note. The S corporation reported an ordinary loss of $150,000 at the end of 2016 and ordinary income of $20,000 at the end of 2017. What are Jared's bases in his stock and his note at the end of both 2016 and 2017?
A) At the end of 2016, his stock basis is zero and note basis is $30,000; at the end of 2017, his stock basis is $10,000 and his note basis is $30,000
B) At the end of 2016, his stock basis is zero and note basis is $5,000; at the end of 2017, his stock basis is zero and his note basis is $15,000
C) At the end of 2016, his stock basis is zero and note basis is $5,000; at the end of 2017, his stock basis is zero and his note basis is $30,000
D) At the end of 2016, his stock basis is zero and note basis is $30,000; at the end of 2017, his stock basis is $10,000 and his note basis is $15,000

Question

Quizplus · Accepted Answer

Stock basis: $50,000 - $50,000 first year loss = zero basis at end of 2016 and it remains that same for 2017. Note basis: $30,000 - $25,000 first year loss = $5,000 basis at end of 2016 + $10,000 income for 2017 = $15,000 basis at end of 2017. Debt basis is restored first.

Jared Owns 50% of an S Corporation's Stock