In: Accounting
Dumbledore Corporation was formed on January 1, 2018. Mr. Smith owns 25% of the corporation's stock. The corporation made an S election immediately, and it is a calendar-year corporation. Mr. Smith contributed $15,000 cash to Dumbledore in exchange for his stock. On August 8, 2018, Dumbledore Corporation borrowed $22,000 from Mr. Smith, and $10,000 from First National Bank under a recourse financing arrangement. Dumbledore had losses from its operations of $104,000 in 2018 and $82,000 in 2019. At the end of 2019, Dumbledore Corporation had not repaid any of the loans from Mr. Smith or the bank. What part of Dumbledore Corporation's 2019 loss may Mr. Smith report on his 2019 individual tax return?
Answer: Mr. Smith will file a tax return with the loss on stocks of $ 20,500 ($ 82,000*25%), being his share in Dumbledore Corporation.
Explanation: Mr. Smith needs to disclose the gains or losses he makes through equity market trading under capital gains while filing your income tax return (ITR). However, the gains/losses are treated as capital gains only if your money remains in the equity market for at least a day. An assesse can incur the following two kinds of capital gains or losses based on the period of holding: