Question 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?

Accepted Answer

1. Calculate Total Basis: Stock ($30,000) + Debt ($10,000) = $40,000.
2. Compare to Loss: $50,000.
3. Deduction Limit: Lesser of Loss or Basis. $40,000.
4. Suspended Loss: $10,000 carried forward.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting debt basis or thinking guarantees create basis (they don't in S Corps).

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?

How to approach this question

Full Answer

Common mistakes

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