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.If Emily is in the 22% tax bracket, what is her tax savings by deducting this loss on her current year's tax return?
A)$8,800
B)$6,600
C)$4,400
D)$2,200

Question

Quizplus · Accepted Answer

Emily's share of the S corporation's loss is 20% of $200,000, which equals $40,000. Since she is in the 22% tax bracket, her tax savings from deducting this loss would be 22% of $40,000, which equals $8,800. However, her basis for deducting losses includes her initial investment and her share of the corporation's debt. Initially, her basis is $10,000 (her investment). Her share of the corporation's loan, which she can also count towards her basis, is 20% of $100,000, or $20,000. Thus, her total basis is $30,000. Since her loss share ($40,000) exceeds her basis ($30,000), she can only deduct losses up to her basis amount. Therefore, her deductible loss is $30,000, and her tax savings are 22% of $30,000, which equals $6,600. My initial calculation was incorrect; the correct answer is B, $6,600.

Emily Is a 20% Shareholder in an S Corporation