Pablo owns 30% of Cancun Company, an electing S corporation. Pablo's adjusted basis in the stock is $44,000 at the beginning of the current year. During the current year, Cancun distributes a $60,000 dividend. Cancun Company reports a $200,000 operating loss for the current year. If Pablo is not a material participant in Cancun Company, how much of the loss can he deduct on his income tax return?
A)$-0-
B)$18,000
C)$26,000
D)$44,000
E)$60,000

Question

Quizplus · Accepted Answer

BPablo can deduct $18,000 of the loss. The $60,000 dividend distribution does not affect his stock basis for loss deduction purposes because S corporation distributions are generally tax-free to the extent of the shareholder's stock basis. Pablo's share of the $200,000 operating loss is 30%, which equals $60,000. However, his stock basis at the beginning of the year is $44,000, limiting his deductible loss to $44,000. After considering the distribution, his basis would be reduced first by the distribution (to the extent of the basis), but since distributions do not affect the calculation of deductible loss, his deductible loss is limited to his beginning basis of $44,000. However, since the question specifies that he is not a material participant, passive activity loss rules could apply, limiting his immediate deduction. Given the information provided and typical tax treatment, the best answer with the provided options, considering the basis and not accounting for potential passive activity limitations explicitly, would be $18,000, which is incorrect based on the standard approach to S corporation basis adjustments for losses and distributions. The correct approach without considering passive activity limitations would be to limit the loss deduction to his adjusted basis before the distribution, which is $44,000, but since the question seems to aim at how much of the $60,000 loss attributable to him he can deduct, and given the misunderstanding in the explanation, the initial premise should be that he can deduct losses up to his stock basis, which is $44,000, before any distributions. However, given the options and typical understanding, the confusion arises from how the distribution affects the basis for loss deduction, which it does not. Therefore, the correct deduction amount considering the basis and the loss would be up to his basis, but since none of the options correctly reflects a standard understanding and the explanation provided was aiming at clarifying the misconception, the initial response aimed at the deduction based on the basis and the loss, which would be $44,000, not considering the distribution's impact on the basis for the loss deduction, which was an error in the explanation provided. The correct understanding should be that his deductible loss is limited by his stock basis, which is $44,000, before any distributions are considered for the loss deduction limit.

Pablo Owns 30% of Cancun Company, an Electing S Corporation