Question

A calendar year C corporation has a $39000 NOL in 2009, but elects S status for 2010 and generates an NOL of $30000 in 2010. At all times during 2010, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock. Kris, one of the 10 shareholders, has an adjusted stock basis of $2300 at the beginning of 2010. What amount of the loss, if any, is deductible by Kris in 2010?

a. None

b. $2300

c. $3000

d. $6300

Answer 1

The impact of the election is that the S corporation's items of income, loss, deductions and credits flow to the shareholder and are taxed on the shareholder's personal return.

When a shareholder is allocated an item of S corporation loss or deduction, the shareholder must first have adequate stock basis to claim that loss and/or deduction item.

Accordingly, following the above provisions loss deductible by Kris is as follows:

Loss attributable to Kris @10% of stock owned by him = $30,000*10% = $3,000

However, the loss is limited to the stock basis. Thus loss deductible is limited to $2,300