ExpertHard1 markMultiple Choice
CPA · Question 17 · Area II: Entity Tax Compliance
A shareholder of an S Corporation has a stock basis of $10,000 and a debt basis of $5,000 (from a direct loan to the corp) at the beginning of Year 1. In Year 1, the S Corp reports an ordinary loss of $20,000. In Year 2, the S Corp reports ordinary income of $8,000. No distributions are made. What is the shareholder's debt basis at the end of Year 2?
A shareholder of an S Corporation has a stock basis of $10,000 and a debt basis of $5,000 (from a direct loan to the corp) at the beginning of Year 1. In Year 1, the S Corp reports an ordinary loss of $20,000. In Year 2, the S Corp reports ordinary income of $8,000. No distributions are made. What is the shareholder's debt basis at the end of Year 2?
Answer options:
A.
$0
B.
$5,000
C.
$3,000
D.
$8,000
How to approach this question
Ordering: 1. Loss reduces Stock Basis to 0. 2. Loss reduces Debt Basis to 0. 3. Subsequent Income restores Debt Basis FIRST, then Stock Basis. Year 1: Used $5k debt basis (now 0). Year 2: $8k income. $5k suspended loss from Year 1 is treated as incurred in Year 2. Net increase = $3k ($8k income - $5k loss used). Debt basis restored by net increase: $3k.
Full Answer
C.$3,000✓ Correct
C
IRC §1367(b)(2)(B). Year 1: Loss $20k. Stock Basis $10k -> $0. Debt Basis $5k -> $0. Suspended Loss $5k. Year 2: Income $8k. The $5k suspended loss is allowed against the $8k income. Net increase = $3,000. This net increase restores Debt Basis first. Debt Basis = $0 + $3,000 = $3,000.
Common mistakes
Restoring stock basis first; forgetting to net the suspended loss usage against the income for the basis increase calculation.
Practice the full CPA TCP Practice Exam 5
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive is granted an Incentive Stock Option (ISO) to purchase 1,000 shares of co...MediumQ02A taxpayer has a $500,000 interest-free loan from their employer outstanding for the entire Year ...MediumQ03A taxpayer wants to donate stock held for 5 years to a public charity. The stock has an adjusted ...MediumQ04An individual taxpayer had an AGI of $160,000 in Year 1 and a tax liability of $30,000. In Year 2...MediumQ05A taxpayer invests $50,000 cash for a 20% interest in a partnership. The partnership takes out a ...Hard