Question

Adam owns 100% of an S Corp at the beginning of the year 20X1 . The...

Adam owns 100% of an S Corp at the beginning of the year 20X1 . The basis of his stock is $10,000. He has made 2 loans to the corporation -a 5year loan for $10,000 and a 6 year loan for $15,000. The S Corp has a 20X1 taxable loss in the amount of $20,000. In 20X2 the S Corp has taxable income of $5,000. What is the basis of the loans at December 31, 20X2?

A) 5 year loan $6,000 ; 6 year loan ; $9,000 B) 5 year loan; $7,500: 6 year loan: $12,500 C) 5 year loan: $8,000: 6 year loan $12,000 D) 5 year loan; $9,000 ; 6 year loan $9,000

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Answer #1

Option C

Basis of Share of S Corp is $10,000

Loss in 20X1 ($20,000)

Profit in the year 20X2 $5,000

Net Worth ($5,000)

Distributing the loss proportionately to the loan available, in the ratio of amount of loan i.e $10,000:$15,000

We get loan at the end of year 20X2 as

5 year loan- [$10,000-(5000*2/5)]=$8,000

6 year loan- [$15,000-(5000*3/5)]=$12,000

The proportionate to distribute the loss of networth could be taken by applying any other assumption regarding loan ( period of loan etc.)

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