Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:

Question

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In an S corporation, losses and profits are allocated to shareholders based on their percentage of ownership. Grant and Amy each own 50% of the corporation's stock, so they must both be allocated 50% of the operating loss. Option B is not accurate; special allocations can only be made in certain circumstances, such as when there are different classes of stock with different rights. Option C is incorrect; shareholders of an S corporation are allowed to take a deduction for their share of any operating losses. Option D is not relevant to the question as preferred stock would not affect the allocation of the operating loss to common shareholders.

Grant and Amy Have Formed a New Business to Be