[1] On December 31, Year 1, Mr. Vear purchased 50% of S corporation Z’s only cla
ID: 2529008 • Letter: #
Question
[1] On December 31, Year 1, Mr. Vear purchased 50% of S corporation Z’s only class of stock outstanding for $100,000. Z is an electing S corporation. On November 30, Year 2, he purchased the other 50% of its stock for $100,000. For Year 2, Z Corporation had an ordinary loss of $255,500. How much of the loss can Mr. Vear deduct on his individual income tax return for Year 2?
A.
$127,750
B.
$138,600
C.
$233,800
D.
$255,500
[ 2 ] Magnolia Corporation, a calendar-year S corporation, was formed on January 1, Year 1. Kathy owns 25% of Magnolia’s outstanding stock, which she purchased for $20,000. In Year 1, Kathy guaranteed a corporate loan for $40,000. In Year 2, Kathy made payments on the loan totaling $10,000. Magnolia had losses of $90,000 and $60,000 in Year 1 and Year 2, respectively. What is the amount of the unallowed loss that Kathy can carry over to Year 3?
A.
$0
B.
$7,500
C.
$10,000
D.
$17,500
[ 3 ] XYZ Corporation is a qualified S corporation. In 2016, its books and records reflected the following transactions:
Business income
$500,000
Real estate rental loss
$(20,000)
Interest income
$5,000
Salaries and wages
$(50,000)
Depreciation (without Section 179 expense)
$(40,000)
Section 179 expense
$(10,000)
Other business deductions
$(300,000)
What is XYZ’s ordinary income (loss) to be reported on its 2016 Form 1120S?
A.
$85,000
B.
$110,000
C.
$115,000
D.
$105,000
Fact Pattern: Day Corporation, an S corporation, reported a $73,000 ordinary loss for Year 1 (a non-leap year). Day uses the calendar year as its taxable year, as do all of its shareholders. Individual B owns 25% of the Day stock at all times during Year 1. B’s basis in his Day Corporation stock at the beginning of Year 1 was $10,000. B materially participates in Day’s business. At the end of Year 1, Day is liable for the following:
Third-party creditors
$15,000
Individual B
3,000
Other shareholders
9,000
[4] What amount of Day’s losses may be deducted by B in Year 1, and what amount of Day’s losses can be carried over by B to Year 2?
A.
Deducted, $18,250; carryover, $0.
B.
Deducted, $13,000; carryover, $0.
C.
Deducted, $13,000; carryover, $5,250.
D.
Deducted, $18,000; carryover, $250.
A.
$127,750
B.
$138,600
Explanation / Answer
Solution for 1(a):-b) 138600
An S corporation shareholder includes his/her pro rata share of loss from the S corporation [Sec. 1366(a)]. Sec. 1377(a) defines pro rata share as the taxpayer's share of loss determined on a per-day and then a per-share basis.
The loss for the whole year was $255,500, which is $700 per day ($255,500 ÷ 365 days). Therefore, Vear's share is $138,600 [$127,750 + ($700 × 50% × 31 days)] because Vear owned 50% of the stock for the full year and the other 50% for 31 days.
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