Funky Chicken is a calendar year S corporation with the following current year information: $$\begin{array} { l r }
\text { Operating loss } & \$ ( 300,000 ) \
\text { Liabilities: } & \
\quad \text { Notes payable, Big Bank } & 30,000 \
\text { Notes payable, June Cross } & 20,000
\end{array}$$ 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?

Question

Funky Chicken is a calendar year S corporation with the following current year information: $$\begin{array} { l r } 
\text { Operating loss } & \$ ( 300,000 ) \
\text { Liabilities: } & \
\quad \text { Notes payable, Big Bank } & 30,000 \
\text { Notes payable, June Cross } & 20,000
\end{array}$$ 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?

Quizplus · Accepted Answer

June Cross bought 60% of the company's stock on January 1 and therefore would be allocated 60% of the operating loss for the entire year. This allocation would be $180,000 ($300,000 operating loss x 60% ownership percentage). Since her basis in the corporation was $45,000 and she loaned the corporation $20,000 during the year, her total basis at year-end is $65,000 ($45,000 + $20,000). Her allowable deduction from the loss is limited to her basis, therefore June can deduct $65,000 on her Form 1040.

Funky Chicken Is a Calendar Year S Corporation with the Following