On January 2, 2011, David loans his S corporation $10,000, and by the end of 2011 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2012, the company's operating income is $10,000.The company also makes distributions to David of $11,000.David reports a(n):

Question

Quizplus · Accepted Answer

David's stock basis at the end of 2011 was zero, which means he cannot use the distributions to increase his stock basis. Therefore, the distributions are first considered as a return of his loan basis. The amount of distributions that exceeds David's loan basis is considered as a capital gain, which in this case is $1,000 ($11,000 distributions - $10,000 loan basis).

On January 2, 2011, David Loans His S Corporation $10,000