On January 1, 2020, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2020 ordinary business loss was $34,100, and she received no cash distributions during the year. Assume the excess business loss limitation does not apply. Which of the following statements is accurate?

Question

Quizplus · Accepted Answer

Laura's initial contribution of $30,000 increased her basis in Suki to $30,000. Her loan of $8,500 added to her basis in the S corporation, bringing her total basis to $38,500.

Her pro rata share of the ordinary business loss of $34,100 exceeds her basis in the S corporation, which reduces her basis to zero. Since the excess loss does not apply in this scenario, she can fully deduct the loss of $34,100 on her individual tax return.

Her basis in the Suki note remains at $8,500, which means that on January 1, 2021, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500. Therefore, the accurate statement is C.

On January 1, 2020, Laura Wang Contributed $30,000 Cash in Exchange