Question 1

An S Corporation shareholder has a stock basis of $10,000 and a debt basis of $0 at the beginning of Year 1. In Year 1, the S Corp reports an ordinary loss of $15,000. In Year 2, the S Corp reports ordinary income of $8,000. What is the shareholder's stock basis at the end of Year 2?

Accepted Answer

Track both bases. Losses reduce Stock first, then Debt. Income restores Debt first, then Stock.
Year 1 Start: Stock 10, Debt 20.
Year 1 Loss (15): Stock -10 (0), Debt -5 (15).
Year 2 Income 8: Debt +5 (20), Stock +3 (3).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Increasing stock basis before restoring debt basis.

An S Corporation shareholder has a stock basis of $10,000 and a debt basis of $0 at the beginning of Year 1. In Year 1, the S Corp reports an ordinary loss of $15,000. In Year 2, the S Corp reports ordinary income of $8,000. What is the shareholder's stock basis at the end of Year 2?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 2

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