Emily is a 20% shareholder in an S corporation.Emily acquired her interest on January 1 of the current year by investing $10,000 for 20% of the corporation's stock.In March, the corporation took out a bank loan for $100,000.The corporation reported a net loss for the current year of $200,000.How much of this loss can Emily deduct on her current year's tax return?
A)$40,000
B)$30,000
C)$20,000
D)$10,000

Question

Quizplus · Accepted Answer

Emily can deduct $10,000, which is limited to her basis in the S corporation. Her basis starts with her initial investment of $10,000. While shareholders in an S corporation can increase their basis by their share of any corporate debt, Emily does not personally guarantee the bank loan, so it does not increase her basis. Therefore, her deduction is limited to her initial investment of $10,000.

Emily Is a 20% Shareholder in an S Corporation