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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 2 years ago
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