Stephanie owns a 25% interest in a qualifying S corporation.Stephanie's basis in the stock was $40,000 at the end of the year after adjustments are made for capital contributions and distributions (but not operating results).Stephanie also loaned the S corporation $10,000 this year.The S corporation incurred a $240,000 ordinary loss this year.Assume that next year the S corporation's ordinary income is $160,000.Stephanie's basis in her stock at the end of next year is
A)$10,000.
B)$20,000.
C)$30,000.
D)$40,000.

Question

Quizplus · Accepted Answer

Stephanie's initial stock basis is $40,000. Her share of the S corporation's loss is 25% of $240,000, which is $60,000. However, she can only deduct up to her stock basis and loan basis combined, which is $50,000 ($40,000 stock basis + $10,000 loan). This reduces her stock basis to $0 and her loan basis to $0. Next year, her share of the S corporation's income is 25% of $160,000, which is $40,000. This increases her stock basis to $40,000. However, since she had a $10,000 loan basis that was reduced to $0, the first $10,000 of income restores her loan basis, leaving her stock basis at $30,000.

Stephanie Owns a 25% Interest in a Qualifying S Corporation