Question

In its first year of existence, KES, an S corporation, reported a business loss of

$10,000. Kim, KES's sole shareholder, reports $50,000 of taxable income from sources other than KES. What must you know in order to determine whether she can deduct the $10,000
loss against her other income? Explain.

Answer 1

To determine if Kim can deduct the $10,000 loss from her S corporation against her other income, it is necessary to consider her stock basis in the corporation, the at-risk rules, and the passive activity loss rules.

Step-by-step explanation:

To determine whether Kim can deduct the $10,000 loss from her S corporation, KES, against her other taxable income, we must consider a few key pieces of information:

• Her stock basis in the S corporation. Shareholders can only deduct losses to the extent of their stock basis, which is their investment in the company.
• The at-risk rules, which limit loss deductions to the amount the shareholder has at risk in the business. This includes money and property contributed to the business and certain borrowed amounts for which the shareholder is personally liable.
• The passive activity loss rules. If the business loss is from a passive activity and Kim doesn't have passive income, she may not be able to deduct it currently. A passive activity is generally one in which the taxpayer does not materially participate.

Without this information, we cannot accurately determine the deductibility of the loss. However, if the losses exceed her basis, are not at risk, or come from passive activities with no passive income, they generally cannot be deducted against other income.