Question

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $46,200 loss this year (year 1). Assume her stock basis is $10,480 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,120. In year 2, Bikes-R-Us, reported ordinary income of $12,240. (Leave no answer blank. Enter zero if applicable.) Required: What amount is Jessica allowed to deduct in year 1 and year 2? What are her stock and debt bases in the corporation at the end of year 1? What are her stock and debt bases in the corporation at the end of year 2?

Answer 1

Ans 1 The loss allocated of the corporation for Jessica is 1/3*46200=$15400. The stock basis is $10480. The loss which can be deducted is $10480 equal to her stock basis. Now the loss left after deduction is $4920. From this $3000 further loss is allowed to be deducted which reduces her stock basis as 0. So now the loss left $1920 can be suspended for future, which can be absorbed when there is additional stock basis.

Ans b The debt bases is 0 and there is 0 stock basis as all is absorbed in losses incurred by the corporation

c) In year 2 the income is $12240 out of which Jessica share is 12240/3=$4080. So this increase her debt basis first by $3120 and stock basis by $960. Now she will be able to absorb $1920 first from her stock basis i.e $960 and than from debt basis i.e. $960. So at the end of year 2 the stock bais is 0 and debt basis is $2160