Question

sunita is a one-third owner in bikes-r-us, an s corporation that experienced a $45,000 loss this year (year 1). required: if her stock basis is $10,000 at the beginning of the year, how much of this loss clears the hurdle for deductibility (assume the at-risk limitation equals the tax-basis limitation)? if she cannot deduct the whole loss, what happens to the remainder? is she able to deduct her entire loss if she sells her stock at year-end?

Answer 1

Sunita can deduct $10,000 of the $45,000 loss for the current year. The remainder is carried forward to offset future income or gains. If she sells her stock, the deductibility of the loss depends on the sale price.

Step-by-step explanation:

To determine how much of the $45,000 loss clears the hurdle for deductibility, we need to calculate Sunita's at-risk limitation and tax-basis limitation. Since the at-risk limitation is assumed to be equal to the tax-basis limitation, we will only need to consider the tax-basis limitation.

Sunita's stock basis at the beginning of the year is $10,000. When there is a loss, the deductible amount is limited to the stock basis. So in this case, if her stock basis is $10,000 and the loss is $45,000, only $10,000 of the loss clears the hurdle for deductibility.

If Sunita cannot deduct the whole loss, the remainder is carried forward to future years and can be used to offset future income or gains. She may be able to deduct a portion of the loss in future tax years.

If Sunita sells her stock at year-end, she may be able to deduct her entire loss depending on the sale price of the stock. If the sale price is less than her stock basis, she may be able to deduct the full loss. However, if the sale price is higher than her stock basis, she may not be able to deduct the full loss.