Question

In the past several years, Shakira had loaned money to Shakira Inc. (an S corporation) to help the corporation keep afloat in a downturn. Her stock basis in the S corporation is now $0, and she has deducted $45,750 in losses, reducing her debt basis from $152,500 to $106,750. Things appear to be turning around this year, and Shakira Inc. repaid Shakira $30,500 of the $152,500 outstanding loan. What is Shakira’s income, if any, on the partial loan repayment?

Answer 1

S's Debt Basis = 106,750

Total Loan Amount = 152,500

Portion of loan repaid to her = 30,500

Debt with basis is 70% = 106,750/152,500

Debt without basis 30% = 45,750/152,500

Repayment amount of 30,500 must be pro-rated between debt with basis and debt without basis. Thus, out of total repaid amount of 30,500, 30% i.e. $9,150 will be allocated to debt without basis.

Therefore, $9,150 will be considered S's income and capital gain of 9,150 will be recognized by her.