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.He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $75,000.
b.He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $250,000.
c.He can use the entire amount of his share at the beginning of the year. His excess business loss is $500,000.
d.Warren is not entitled to an excess business loss under these circumstances.
e.He can use the $325,000 loss against other nonbusiness income. His excess business loss is $325,000.

Answer 1

The deduction limit for excess business losses for single taxpayers is $250,000. Warren, an S corporation shareholder, can offset $250,000 of the $325,000 loss against nonbusiness income.Thus option b is the correct option.

Step-by-step explanation:

Warren, as an S corporation shareholder, is subject to the rules surrounding excess business losses. The allowable deduction for excess business losses for single taxpayers in the current tax year is $250,000. Therefore, Warren can use $250,000 of the $325,000 loss against other nonbusiness income. This leaves an excess business loss of $75,000 ($325,000 - $250,000).

The deduction limitation is calculated based on the taxpayer's filing status, and in this case, Warren being a single taxpayer, the limit is $250,000. The excess loss not utilized in the current year can be carried forward to future years. The salary received from the corporation doesn't affect this limitation as it is considered separate from the pass-through nature of S corporation income.

In summary, option b is accurate because it correctly reflects Warren's ability to use $250,000 of the loss against other nonbusiness income, and the excess business loss is correctly calculated as $75,000. This ensures compliance with the current tax regulations governing excess business losses for S corporation shareholders.

Therefore option b is the correct option.