An S corporation incurs a net operating loss of $25,000 in the current year and makes no distributions.Its sole shareholder, K, has a basis in the stock of $30,000 and in a note receivable from the corporation of $20,000.The $25,000 has the following impact:

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The net operating loss of an S corporation flows through to the shareholder, reducing the shareholder's basis in the stock. Since K's initial stock basis is $30,000, the $25,000 loss reduces this basis to $5,000. The basis in the note receivable is not affected by the corporation's net operating loss.

An S Corporation Incurs a Net Operating Loss of $25,000