Question

Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time running Sound. During the current year, Sound has a loss of $75,000 from its operations.

I. If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a deduction from AGI.
II. If Sound is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.

Answer 1

If Sound Corporation is an S Corporation, Perry can deduct the loss on his personal tax return. If it is a regular corporation, the corporation can carryforward the loss to reduce taxable income in future years.

Step-by-step explanation:

Statement I: If Sound Corporation is an S Corporation, Perry can deduct the loss on his personal tax return as a deduction from AGI. This is because S Corporations are pass-through entities, meaning that the profits and losses of the corporation are passed through to the shareholders and reported on their individual tax returns. The shareholders can then use the loss to offset other income on their personal tax returns.

Statement II: If Sound Corporation is a regular corporation (C Corporation), the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years. Regular corporations have the ability to carryforward losses to future years to offset taxable income, subject to certain limitations.

Therefore, both statements are correct. Perry can deduct the loss on his personal tax return if Sound Corporation is an S Corporation, and if it is a regular corporation, the corporation can carryforward the loss to reduce taxable income in future years.