Question

On January 1, 2018, Leo paid $22,500 for 5 percent of the stock in BLS, an S corporation. In November, he loaned $11,750 to BLS in return for a promissory note. BLS generated a $820,000 operating loss in 2018.

1. How much of his share of the loss can Leo deduct on his 2018 return? Assume the excess business loss limitation does not apply.
2. Compute Leo’s basis in his BLS stock and his BLS note at the end of 2018.

Complete this question by entering your answers in the tabs below.

• Required A
• How much of his share of the loss can Leo deduct on his 2018 return? Assume the excess business loss limitation does not apply.

Deduction

$41,000selected answer incorrect

Answer 1

Answer :

(a)

Particulars	Amount
Leo’s initial basis at the beginning of 2018	$22,500
Increased by 2018 Income Allocation	$0
Add: Additional investment	$11,750
Basis before loss deduction	$34,250
Less: Distribution	$0
Less : Loss Items = $820,000 x 5%	$41,000
Loss carry forward to next year	($6,750)

So, Leo can deduct $34,250 of his share of the loss on his 2018 return and loss of $6,750 shall be carry forwarded.

(b) Computation of  Leo’s basis in his BLS stock and his BLS note at the end of 2018 :

Particulars	BLS Stock	BLS Note
Leo’s initial basis	$22,500	$11,750
Increased by 2018 Income Allocation	$0	$0
Decreased by 2018 loss deduction	($22,500)	($11,750)
Adjusted basis at the end of 2018	$0	$0