Peter owns 30% of Bear Company, an electing S corporation. Peter's adjusted basis in the stock is $44,000 at the beginning of the current year. During the current year, Bear distributes a $60,000 dividend. Bear Company reports a $200,000 operating loss for the current year. If Peter is a material participant in Bear Company, how much of the loss can he deduct on his income tax return?
A)$-0-
B)$18,000
C)$26,000
D)$44,000
E)$60,000

Question

Quizplus · Accepted Answer

As Peter is a material participant in Bear Company, he can deduct up to $26,000 of the operating loss on his income tax return, which is 30% of the $86,667 loss ($200,000 loss – $60,000 distribution = $140,000 loss × 30%). However, he cannot deduct more than his adjusted basis in the stock, which is $44,000. Therefore, his deduction is limited to $26,000.

Peter Owns 30% of Bear Company, an Electing S Corporation