ExpertMedium1 markMultiple Choice
CPA · Question 31 · Area II: Entity Tax Compliance
An S Corporation shareholder has a stock basis of $10,000 at the beginning of Year 1. In Year 1, the S Corp reports:<br/>- Ordinary Income: $5,000<br/>- Tax-Exempt Interest: $2,000<br/>- Cash Distribution: $8,000<br/>What is the shareholder's stock basis at the end of Year 1?
An S Corporation shareholder has a stock basis of $10,000 at the beginning of Year 1. In Year 1, the S Corp reports:<br/>- Ordinary Income: $5,000<br/>- Tax-Exempt Interest: $2,000<br/>- Cash Distribution: $8,000<br/>What is the shareholder's stock basis at the end of Year 1?
Answer options:
A.
$7,000
B.
$15,000
C.
$9,000
D.
$5,000
How to approach this question
Order of Basis Adjustments: 1. Start Basis. 2. Add Income (Taxable & Exempt). 3. Subtract Distributions. $10k + $5k + $2k = $17k. $17k - $8k = $9k.
Full Answer
C.$9,000✓ Correct
IRC §1367. Basis increases by income items (including tax-exempt) before distributions are taken into account. Start $10,000 + $5,000 (Ord) + $2,000 (Exempt) = $17,000. Less Distribution $8,000 = $9,000 Ending Basis.
Common mistakes
Forgetting that tax-exempt interest increases basis.
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