Jay is the sole shareholder of James Inc. an S corporation. In 20x1, the S corporation...

Jay is the sole shareholder of James Inc. an S corporation. In 20x1, the S corporation has taxable income of $40,000. Jay's stock basis at January 1st 20x1 is $10,000. In 20x2, James Inc had a loss of $60,000. Which of the following results in 20x2?

A) Jay has a stock basis of negative $10,000

B) Jay has a stock basis of $50,000

C) Jay reports a 20X2 loss of $50,000

D)Jay reports a 20X2 loss of $60,000

Solutions

Expert Solution

Jay the sole shareholder of James Inc. (S Corporation) had $ 10,000 stock basis on 1st January 20x1. Stock basis are the increased or decreased each year based on the performance of the S corporation. i.e. net income earned in a particular year would increase the stock basis and loss shall be deducted from the stock basis. Non dividend distributions also reduce the stock basis.

In the given question, during 20x1, S corporation had a net income of $ 40,000 which shall be entirely added to the stock basis of Jay (as he is the sole shareholder). This makes the stock basis at the end of 20x1 to be 10,000 + 40,000 = $ 50,000. The stock basis at the beginning of 20x2 is $ 50,000 and it shall be reduced by the loss of $ 60,000 incurred during 20x2.

Therefore at the end of 20x2, the stock basis shall be = 50,000 - 60,000 = - 10,000

Therefore option A - Jay has a stock basis of negative $ 10,000 is appropriate.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that...

William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that operated a popular nightclub of the same name in Columbus, Georgia. Sharp maintained a corporate checking account but paid the club’s employees, suppliers, and entertainers in cash out of the club’s proceeds. Sharp owned the property on which the club was located. He rented it to the club but made mortgage payments out of the club’s proceeds and often paid other personal expenses with...

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who...

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $7,200. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $25,500 business loss. What amount of the loss...

S corporation’s sole shareholder has a basis of $20,000, and lent the corporation $20,000. The net...

S corporation’s sole shareholder has a basis of $20,000, and lent the corporation $20,000. The net operating loss for the year was $50,000. Explain the effect on the shareholder

Strap Corporation is the sole shareholder of X, Inc. Strap and X do not file a...

Strap Corporation is the sole shareholder of X, Inc. Strap and X do not file a consolidated return, and Strap has held its X stock for more than two years. Strap has a $150,000 basis in its X stock. Boot is a prospective buyer and is willing to purchase all of the X stock, but he is unable to pay the $500,000 price demanded by Strap even though he believes it to be fair. X has $100,000 cash on hand...

Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and...

Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and Joe wishes to sell his stock to Bill Corker, who has limited funds. The parties proceeds are as follows: a. Joe sells 40 percent of his stock to bill for $50,000 payble over 10 years. b. Tucker Parts redeems the remaining 60 percent of Joe's stock for $75,000 in cash. What are the tax consequences to Joe? Does it make any difference if the...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 15 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $1,470,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings. Assume ZNO’s marginal tax rate is 30 percent. How much tax will ZNO pay on the dividend it receives from JBD?...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 22 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $2,000,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings. How much tax will ZNO pay on the dividend it receives from JBD? What is ZNO’s tax rate on the dividend...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 22 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $2,100,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings. How much tax will ZNO pay on the dividend it receives from JBD? What is ZNO’s tax rate on the dividend...

Eva has been the sole shareholder of a calendar year S-Corporation since its inception. Eva’s stock...

Eva has been the sole shareholder of a calendar year S-Corporation since its inception. Eva’s stock basis is $50,000, her debt basis is $15,000 and she receives a cash distribution of $88,000. There are no special elections made. a. What is the tax impact of the distribution if the S-Corporation has accumulated adjustment account of $40,000, adjusted earning and profit of $30,000 and $0 other adjustment account before the distribution?

1. Eva has been the sole shareholder of a calendar year S-Corporation since its inception. Eva’s...

1. Eva has been the sole shareholder of a calendar year S-Corporation since its inception. Eva’s stock basis is $50,000, her debt basis is $15,000 and she receives a cash distribution of $88,000. There are no special elections made. b. What is the tax impact of the distribution if instead the S-Corporation has accumulated adjustment account of $40,000, $0 adjusted earning and profit and $0 other adjustment account before the distribution?

Subjects