Timo is the sole owner of Jazz Inc., an S corporation. On October 31, 2015, Timo

Question

Timo is the sole owner of Jazz Inc., an S corporation. On October 31, 2015, Timo executed an unsecured demand promissory note of $15,000 and transferred the note to Jazz (Jazz could require Timo to pay it $15,000 on demand). When Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero. On January 31, 2016, Timo paid the $15,000 to Jazz as required by the promissory note. For the taxable year ending December 31, 2015, Jazz incurred a business loss of $12,000. How much of the loss clears the stock and debt basis hurdles for deductibility?

How much Timo deduct for its own

Explanation / Answer

Amount of loss clears the stock and debt basis hurdles for deductibility = $0 ,

No cost was incurred or no payment was made while executing the Note on October 31, 2015, until the next year (January 31, 2016,) and when Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero ,his adjusted basis will not increase until he makes payment to Jazz in 2016.

Therefore, Timo is not allowed to deduct the business loss of $12,000 that is incurred by Jazz for the taxable year ending December 31, 2015.

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