3) Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the begi

Question

3) Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2016 Parker's basis in his Johnson Corp. stock was $14,000. During 2016, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2017, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2016? b. What is Parker's stock and debt basis at the end of 2016? c. What is Parker's stock and debt basis at the end of 2017?

Explanation / Answer

Answer a & b. All $25,000 of the ordinary loss clears the tax basis hurdle for deductibility. The first $14,000 of the loss reduces his stock basis to $0 at the end of 2016 and the remaining $11,000 reduces his debt basis to $9,000 ($20,000 - $11,000) Answer c. The $8,000 of ordinary income restores a portion of his Parker's debt basis. So, at the end of 2017, Parker's stock basis is $0 and his debt basis is $17,000 ($9,000 + $8,000)

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