Question

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2018, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

a. $0 stock basis; $8,000 debt basis.
b. $5,000 stock basis; $3,000 debt basis.
c. $0 stock basis; $10,000 debt basis.
d. $5,000 stock basis; $10,000 debt basis.
e. None of the choices are correct.

Answer 1

Jamaal's stock basis after the transactions in 2018 is $0 since the distribution exceeded his adjusted stock basis. The debt basis is reduced by the remaining amount of the distribution exceeding the stock basis, resulting in an $8,000 debt basis. The correct option is A.

Step-by-step explanation:

To determine Jamaal's stock and debt basis in his S corporation after the transactions in 2018, we must follow a series of steps:

1. Start with Jamaal's initial stock basis which is $1,000.
2. Add the S corporation income allocated to him for the year, which is $4,000. His stock basis is now $5,000.
3. Subtract the distribution he received, which is $7,000. Since the distribution exceeds his stock basis, reduce the stock basis to $0, and decrease the remaining portion ($2,000) from his debt basis.
4. Adjust Jamaal's debt basis. Initial debt basis is $10,000. After reducing by the remaining distribution portion ($2,000), the new debt basis is $8,000.

Following these steps, the correct answer for Jamaal's stock and debt basis after these transactions in 2018 is $0 stock basis; $8,000 debt basis. The correct option is A.