An S Corporation shareholder has a stock basis of $10,000 and a debt basis (direct loan to S Corp) of $5,000 at the beginning of Year 1. In Year 1, the S Corp reports an ordinary loss of $20,000. What is the shareholder's suspended loss and remaining basis at the end of Year 1?

Answer options:

Suspended Loss $5,000; Stock Basis $0; Debt Basis $0

Suspended Loss $10,000; Stock Basis $0; Debt Basis $5,000

Suspended Loss $0; Stock Basis $0; Debt Basis $0

How to approach this question

Order of Basis Reduction: 1. Stock Basis to 0. 2. Debt Basis to 0. Excess loss is suspended.

Full Answer

B.Suspended Loss $5,000; Stock Basis $0; Debt Basis $0✓ Correct

IRC §1366(d). Total Basis Available = $10,000 (Stock) + $5,000 (Debt) = $15,000. <br/>Loss = $20,000. <br/>Deductible = $15,000. <br/>Suspended = $5,000. <br/>Ending Basis = $0 (Stock) and $0 (Debt).

Common mistakes

Forgetting that debt basis can be used for losses.

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