Funky Chicken is a calendar year S corporation with the following current year information: 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?

Question

Funky Chicken is a calendar year S corporation with the following current year information:  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?

Quizplus · Accepted Answer

As an S corporation shareholder, Cross can deduct her share of the operating loss on her Form 1040. She owns 60% of Funky Chicken, so her share of the operating loss would be calculated as follows: 
Operating loss: $(70,000) 
60% share: $42,000 
Plus: Cross's loan to the company: $20,000 
Total deduction: $62,000 
However, the deductible amount cannot exceed her basis in the company, which is $45,000 (the amount she paid to buy her 60% share). Therefore, the maximum amount she can deduct is $45,000 + $20,000 = $65,000. So the correct answer is C.

Funky Chicken Is a Calendar Year S Corporation with the Following