Supposethat at the beginning of 2020 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2020, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50percent shareholder of the S corporation?

Question

Quizplus · Accepted Answer

Jamaal's initial stock basis is $27,000. As a 50% shareholder, he can deduct $40,000 (50% of $80,000) of the S corporation's loss against his stock basis, reducing it to $0 because a shareholder's stock basis cannot go below zero. The remaining $40,000 loss can then be applied to his $10,000 loan to the corporation, but since the loan basis also cannot go below zero, only $10,000 of the loss can be applied here, leaving $30,000 of the loss undeducted. Thus, at the end of the year, Jamaal's stock basis is $0 and his debt basis is also reduced to $0, with $30,000 of the loss suspended until he has sufficient basis in the future. None of the provided choices accurately reflect this outcome.

Supposethat at the Beginning of 2020 Jamaal's Basis in His