ExpertMedium1 markMultiple Choice
CPA · Question 44 · Area 3: Entity Tax Compliance
An S Corporation incurs a Net Operating Loss (NOL) of $50,000 in Year 1. The sole shareholder has a stock basis of $30,000 and a debt basis (loan to corp) of $10,000. How much loss can the shareholder deduct in Year 1?
An S Corporation incurs a Net Operating Loss (NOL) of $50,000 in Year 1. The sole shareholder has a stock basis of $30,000 and a debt basis (loan to corp) of $10,000. How much loss can the shareholder deduct in Year 1?
Answer options:
A.
$30,000
B.
$50,000
C.
$40,000
D.
$0
How to approach this question
1. Calculate Total Basis: Stock ($30,000) + Debt ($10,000) = $40,000.<br/>2. Compare to Loss: $50,000.<br/>3. Deduction Limit: Lesser of Loss or Basis. $40,000.<br/>4. Suspended Loss: $10,000 carried forward.
Full Answer
C.$40,000✓ Correct
C
The shareholder can deduct losses to the extent of stock basis plus debt basis. $30,000 + $10,000 = $40,000 allowed. The remaining $10,000 is suspended.
Common mistakes
Forgetting debt basis or thinking guarantees create basis (they don't in S Corps).
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