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

Since June Cross owns 60% of Funky Chicken and has made a loan to the company, she is considered to be an active participant in the business. Therefore, she may deduct up to $65,000 of the operating loss on her Form 1040. The calculation is as follows:
Total operating loss = $110,000 (given in the current year information)
June Cross's share of the operating loss = 60% x $110,000 = $66,000
However, the maximum amount that June Cross can deduct as an active participant is the sum of her investment and loan, which is $45,000 + $20,000 = $65,000. Therefore, the answer is choice C.

Funky Chicken Is a Calendar Year S Corporation with the Following