Shareholder A sells their 50% interest in an S Corporation on June 30, Year 1 (exactly halfway through the year). The S Corporation has a non-separately stated loss of $100,000 for the full Year 1. No election is made to close the books. What is Shareholder A's share of the loss?

Answer options:

$50,000

$25,000

$100,000

How to approach this question

Pro-rata allocation: Total Loss * Ownership % * (Days Owned / 365).

Full Answer

B.$25,000✓ Correct

IRC §1377(a)(1). Loss is allocated on a per-share, per-day basis. <br/>Shareholder A owned 50% of the stock for 50% of the year (approx). <br/>Allocation = $100,000 * 50% * (181/365 approx) = ~$25,000.

Common mistakes

Allocating based on ownership at year-end only.

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