Question

2. Southern Corporation, a calendar year corporation, was formed 3 years ago by its sole shareholder, Jason, who has operated as an S corporation since its inception. Last year, Jason made a direct loan to the company in the amount of $4,000. Southern Corporation has paid interest on the loan but has not yet paid any principal (Assume the loan qualifies as debt for tax purposes). In year 4, War Eagle Corp experiences a $25,000 ordinary business loss and earns $1,000 of tax-exempt income. At the beginning of year 4, Jason's basis in his stock was $8,000 and his basis in his corporate debt was $4,000. A. What amount of loss clears the tax-basis limitation in year 4? B. What is Jason's basis in his stock and debt at the end of year 4? C. Identify any loss carryforward amount at the end of year 4.

Answer 1

At the beginning of the year, Jason's basis in the stock was $8,000 and his basis in the corporate debt was $4,000.

A. Stock is increased by tax exempt income and decreased by ordinary loss.

Stock basis after tax exempt income = $9,000
Of the $25,000 loss, $13,000($9,000 + $4,000) amount of loss clears the tax basis limitation in year 4.

Answer is $13,000.

B. Jason's stock basis is reduced from $9,000 to 0 and debt basis is reduced from $5,000 to 0. Jason has a suspended loss of $12,000($25,000 - $13,000).

C. Loss carry forward amount = $25,000 - $13,000 = $12,000