On January 2, 2019, David loans his S corporation $10,000. By the end of 2019 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2020, the company's operating income is $10,000. The company makes 2020 distributions to David of $11,000. David reports a(n):

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David's loan basis is reduced to $8,000 by the end of 2019. In 2020, the company's operating income increases his basis by $10,000, making his total basis $18,000. The distribution of $11,000 reduces his basis to $7,000. Since his stock basis was zero, the $1,000 excess distribution over his loan basis is treated as a long-term capital gain (LTCG).

On January 2, 2019, David Loans His S Corporation $10,000