Questions: Suppose that at the beginning of 2023 Jamaal's basis in his S corporation stock was 27,000 and Jamaal has directly loaned the S corporation 10,000. During 2023, the S corporation reported an 80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation?

The answer is the second one (or B): Jamaal's stock basis is $0 and his debt basis is $0.

Explanation:

1. Initial Basis Calculation:

   • Jamaal's initial stock basis at the beginning of 2023: $27,000
   • Jamaal's initial loan (debt basis) to the S corporation: $10,000

2. Loss Allocation:

   • The S corporation reported an $80,000 ordinary business loss.
   • Jamaal is a 50% shareholder, so his share of the loss is 50% of $80,000, which is $40,000.

3. Basis Reduction:

   • The loss first reduces Jamaal's stock basis.
   • Jamaal's stock basis before the loss: $27,000
   • Loss allocated to stock basis: $27,000 (since the stock basis cannot go below zero)
   • Remaining loss to be allocated to debt basis: $40,000 - $27,000 = $13,000

4. Debt Basis Reduction:

   • Jamaal's debt basis before the loss: $10,000
   • Loss allocated to debt basis: $10,000 (since the debt basis cannot go below zero)
   • Remaining loss: $13,000 - $10,000 = $3,000 (this excess loss is suspended and carried forward to future years)

5. End of Year Basis:

   • Stock basis at the end of the year: $0 (reduced from $27,000 to $0)
   • Debt basis at the end of the year: $0 (reduced from $10,000 to $0)

Therefore, after accounting for the loss deductions, Jamaal's stock basis is $0 and his debt basis is $0 at the end of the year.