Question

Anuary 1, year 1, ginger, an individual, paid $23,000 for 6 percent of the stock in root corp., an s corporation. in november year 1, he loaned $11,000 to root corp. in return for a promissory note. root corp. generated a $680,000 operating loss in year 1. root corp. generated $416,000 ordinary business income in year 2. required: how much of ginger’s share of this income is included in his year 2 taxable income? compute ginger’s basis in his root corp. stock and his root corp. note at the end of year 2. how would your answers to parts a and b change if root corp.’s ordinary business income was only $228,000?

Answer 1

Ginger's share of Root Corp.'s income included in his year 2 taxable income is $24,960. At the end of year 2, Ginger's basis in his Root Corp. stock is $23,000, and his basis in the Root Corp. note is $11,000.

Step-by-step explanation:

Ginger's share of income from Root Corp. is determined by the percentage ownership in the S corporation. In this case, Ginger owns 6 percent of the stock, so his share of the year 2 ordinary business income is calculated as
`\( 0.06 * $416,000 = $24,960 \)`. This amount is included in Ginger's taxable income for the year.

To calculate Ginger's basis in his Root Corp. stock at the end of year 2, we start with the initial investment of $23,000 and adjust it for the share of income ($24,960) and the loan made to Root Corp. ($11,000). Therefore, Ginger's basis in the stock is $23,000 + $24,960 - $11,000 = $36,960.

Similarly, Ginger's basis in the Root Corp. note is the loan amount made to the corporation, which is $11,000. These basis calculations are crucial for tax purposes, as they help determine the tax implications of income or losses from the S corporation.

If Root Corp.'s ordinary business income was only $228,000, Ginger's share of income included in his taxable income would be
`\( 0.06 * $228,000 = $13,680 \)`. The basis calculations for Ginger's stock and note would then be adjusted accordingly based on the lower income figure.