Question

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 clears the tax-basis limitation, and what is James’s basis in his Birch Corp. stock and Birch Corp. debt in each of the following alternative scenarios?

a. At the beginning of the year, James's basis in his Birch Corp. stock was $47,600 and his basis in his Birch Corp. debt was $7,200.

	Amount of loss clearing tax basis limitation Basis in stock Basis in debt

b. At the beginning of the year, James's basis in his Birch Corp. stock was $9,300 and his basis in his Birch Corp. debt was $7,200.

	Amount of loss clearing tax basis limitation Basis in stock Basis in debt

c. At the beginning of the year, James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $7,200.

	Amount of loss clearing tax basis limitation Basis in stock Basis in debt

Answer 1

what amount of the loss clears the tax basis limitation and what is james basis in his Birch corp stock and birch corp debt in each of the following alternative scenarios?

1. At the beginning of the year, james basis in his birch corp stock was $47,600 and his basis in his Birch corp debt was $7200.

Amount of loss clearing tax basis Limitation	25500
Basis in stock [47600-25500]	22100
Basis in debt	7200

b. At the beginning of the year, James's basis in his Birch Corp. stock was $9,300 and his basis in his Birch Corp. debt was $7,200.

Stock basis is reduced from $9300 to $0 and the debt basis is reduced from $7200 to $0. James has a suspended loss of $11,000 [$25,500-$16500]

Amount of loss clearing tax basis Limitation	16500
Basis in stock	0
Basis in debt	0

c. At the beginning of the year, James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $7,200.

Stock Basis remains at $0 and the debt is reduced from $7200 to $0 and has a suspended loss of [25,500-$7200] is $18300

Amount of loss clearing tax basis Limitation	7200
Basis in stock	0
Basis in debt	0