ExpertHard1 markMultiple Choice
CPA · Question 34 · Area V: Entity Taxation
At the beginning of the year, a shareholder had a stock basis of $10,000 in an S corporation. During the year, the shareholder's share of ordinary income was $5,000, and the corporation made a cash distribution of $12,000 to the shareholder. What is the shareholder's stock basis at year-end?
At the beginning of the year, a shareholder had a stock basis of $10,000 in an S corporation. During the year, the shareholder's share of ordinary income was $5,000, and the corporation made a cash distribution of $12,000 to the shareholder. What is the shareholder's stock basis at year-end?
Answer options:
A.
$0
B.
$3,000
C.
$3,000
D.
$10,000
How to approach this question
Ordering Rule: 1. Increase for Income. 2. Decrease for Distributions. 3. Decrease for Losses.
Full Answer
B.$3,000✓ Correct
C
Basis is adjusted for income items BEFORE distributions. Beginning Basis ($10,000) + Income ($5,000) = $15,000. Less Distribution ($12,000) = $3,000 Ending Basis.
Common mistakes
Subtracting distribution before adding income (though here it doesn't change the result, it matters for taxability of distribution).
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