Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation.How much income does Jamaal report in 2019 from these transactions?

Question

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Jamaal's basis in his S corporation stock at the beginning of 2019 is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.

Since Jamaal received a $7,000 distribution from the S corporation, we need to determine whether or not that distribution was a taxable event. In order to do so, we consult the ordering rules for S corporation distributions:

1. Taxable income
2. Previously taxed income (PTI)
3. Return of capital
4. Capital gain

Since Jamaal's share of S corporation income was only $4,000, the entire $7,000 distribution was not a taxable event. The first $4,000 of the distribution is considered a return of Jamaal's basis, and the remaining $3,000 is classified as a reduction of his debt basis. Therefore, Jamaal reports $4,000 of income for 2019.

Suppose That at the Beginning of 2019 Jamaal's Basis in His