Suppose Clampett, Inc., terminated its S election on August 28, 2019.At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000.In 2020, J.D.made additional capital contributions of $5,000 on March 15 and $12,000 on September 5.How much loss may J.D.deduct in 2020?

Question

Quizplus · Accepted Answer

When an S corporation terminates its S election, it is deemed to have contributed all of its assets and liabilities to a new corporation, which is usually classified as a C corporation. As a result, any suspended losses from the S corporation are permanently lost and cannot be used to offset income of the C corporation.

However, J.D.'s additional capital contributions of $5,000 and $12,000 in 2020 increase his stock basis to $17,000 ($0 + $5,000 + $12,000), which allows him to deduct up to $17,000 of the suspended loss in 2020. Therefore, the correct answer is (C) $17,000.