Cactus Company is a calendar year S corporation with the following current year information: $\begin{array}{lr}
\text {Operating loss }&\$(120,000)\\text { Liabilities: }\
\text { Notes payable, City Bank}&20,000\
\text {Notes payable, Jake Crow }&20,000\
\end{array}$
On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? Assume the excess business loss limitation does not apply.

Question

Cactus Company is a calendar year S corporation with the following current year information: $\begin{array}{lr}
\text {Operating loss }&\$(120,000)\\text { Liabilities: }\
\text { Notes payable, City Bank}&20,000\
\text {Notes payable, Jake Crow }&20,000\
\end{array}$
 On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? Assume the excess business loss limitation does not apply.

Quizplus · Accepted Answer

John James may deduct $30,000 of the operating loss on his Form 1040. As a 50% shareholder of an S corporation, he is allocated 50% of the company's losses, which would be $60,000 ($120,000 * 50%). However, his deduction is limited to his basis in the stock, which is $30,000, the amount he paid for the stock. The notes payable do not increase his basis because, in an S corporation, only loans made directly from the shareholder to the corporation increase a shareholder's basis.

Cactus Company Is a Calendar Year S Corporation with the Following