Question

Warren, a single taxpayer, is an S corporation shareholder and materially participates in the business. In the current year, Warren's share of losses is $325,000. He also received a salary from the corporation of $80,000. At the beginning of the year, he had a basis in his S corporation stock of $500,000. Which of the following statements regarding how much excess business loss Warren has is true?

a. Warren has an excess business loss of $405,000.
b. Warren has an excess business loss of $325,000.
c. Warren does not have an excess business loss.
d. Warren has an excess business loss of $245,000.

Answer 1

Warren, as a single taxpayer and an S corporation shareholder, will owe corporate income tax on the profits of the S corporation, individual income tax on his salary, and payroll tax on the wages he pays himself. However, he does not have an excess business loss.

Step-by-step explanation:

Warren, as a single taxpayer and an S corporation shareholder, is subject to different types of federal tax. He will owe corporate income tax on the profits of the S corporation, individual income tax on his salary from the corporation, and payroll tax on the wages he pays himself. In this scenario, Warren's share of losses is $325,000, which exceeds his salary of $80,000.

However, the question is referring to Warren's excess business loss, which is calculated by subtracting his basis in the S corporation stock from his share of losses. In this case, Warren's basis in the stock is $500,000, and his share of losses is $325,000. So, the excess business loss is $325,000 - $500,000 = $0.

Therefore, the correct statement is that Warren does not have an excess business loss (option c).