Funky Chicken is a calendar year S corporation with the following current year information: $\begin{array}{lr}
\text {Operating loss }&\$(300,000)\\text { Liabilities: }\
\text { Note payable, Big Bank}&30,000\
\text {Note payable, June Cross }&20,000\
\end{array}$
On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? Assume the excess business loss limitation does not apply.

Question

Funky Chicken is a calendar year S corporation with the following current year information: $\begin{array}{lr}
\text {Operating loss }&\$(300,000)\\text { Liabilities: }\
\text { Note payable, Big Bank}&30,000\
\text {Note payable, June Cross }&20,000\
\end{array}$
 On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? Assume the excess business loss limitation does not apply.

Quizplus · Accepted Answer

Cross can deduct her share of the S corporation's operating loss to the extent of her basis in the stock plus her basis in any direct loans to the corporation. Her initial stock basis is $45,000 (the amount she paid for the stock). She also loaned the company $20,000 directly, which increases her basis for loss deduction purposes. Therefore, her total basis for loss deduction is $65,000. Since the operating loss is $300,000, and she owns 60% of the company, her share of the loss is $180,000 ($300,000 * 60%). However, she can only deduct up to her basis, which is $65,000.

Funky Chicken Is a Calendar Year S Corporation with the Following