Question

At the beginning of the tax year, Lizzie holds a $10,000 stock basis as the sole shareholder of Spike, Inc., an S corporation. During the year, Spike reports the following:

Net taxable income from sales $25,000
Net short-term capital loss (18,000)
Cash distribution to Lizzie, 12/31 40,000
If an amount is zero, enter "0".

a. Determine Lizzie's stock basis at the end of the year. $

Answer 1

Lizzie's stock basis at the end of the year is $0 after accounting for the net taxable income, capital loss, and the cash distribution she received from Spike, Inc.

Step-by-step explanation:

To determine Lizzie's stock basis at the end of the year for her ownership in Spike, Inc., an S corporation, we need to adjust her initial stock basis by the corporation's income, losses, and distributions for the year. Lizzie begins with a $10,000 stock basis. Throughout the year, Spike, Inc. reports a net taxable income of $25,000 from sales and a net short-term capital loss of $18,000. These are both adjustments to the stock basis. The cash distribution Lizzie received on December 31st is $40,000, which also affects her stock basis. The calculation is as follows:

1. Start with initial stock basis: $10,000.
2. Add net taxable income: $10,000 + $25,000 = $35,000.
3. Subtract net short-term capital loss: $35,000 - $18,000 = $17,000.
4. Subtract cash distribution: $17,000 - $40,000. Since the distribution is more than the basis, it would reduce the basis to $0, and the excess $23,000 would be treated as a capital gain for Lizzie.

Therefore, Lizzie's stock basis at the end of the year is $0.