Question

Danni is a single 30 percent owner of Kolt (a business entity). In the current year, Kolt reported a $1,000,000 business loss. Answer the following questions associated with each of the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 15-55 Part a a. Kolt is organized as a C corporation and Danni works 20 hours a week as an employee for Kolt. Danni has a $200,000 basis in her Kolt stock. How much of Kolt’s loss is Danni allowed to deduct this year against her other income?

Answer 1

Question

Danni is a single 30 percent owner of Kolt (a business entity). In the current year, Kolt reported a $1,000,000 business loss. Answer the following questions associated with each of the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 15-55 Part a a. Kolt is organized as a C corporation and Danni works 20 hours a week as an employee for Kolt. Danni has a $200,000 basis in her Kolt stock. How much of Kolt’s loss is Danni allowed to deduct this year against her other income?

Answer:

Scenario 1

If Danni is a 30% owner and not an employee

(1) C Corporation is an entity, which has the effect of double taxation. C Corporations are separate legal entities The profits of the corporation is taxed at 21% . Both the entity and dividend at the hands of the shareholders are taxable. However, the Losses cannot be adjusted towards the personal income of the shareholders.  Only profits are taxed. Any excess profits distributed to the shareholders are also taxed according to the taxable income of the shareholders. In this case of profit, Kolt suffered a loss of $ 1,000,000. Hence Danni cannot deduct the loss from personal income. The Kolt corporation can carry on this loss for 3 years and adjust from its capital gains if it gains in future years.

Scenario 2.

Danni is owner and employee

(2) C corporations are separate from their owners and employees. As a shareholder, the share value has dipped. No dividends accrue and if sold in market, it will be a capital loss. The actual loss suffered would be as under: of $1,000,000, danni has suffered 30% loss due to share holding, which is $300,000. Since this is a personal loss , being an employee, if shares are sold in the market, this amount can be adjusted from personal income.