Question

Dmitri, a shareholder in an S corporation, has a basis of $60,000 in his S corporation stock. His share of this year's S corporation loss is $75,000. Dmitri takes out a $20,000 nonrecourse loan from a local bank and lends the proceeds to the S corporation. As a result of these transactions:a. Dmitri's stock basis is $80,000 before deducting the loss.

b. Dmitri can deduct the loss of $75,000.
c. Dmitri has a stock basis of $60,000 and a loan basis of $20,000 before deducting any loss.
d. Dmitri's stock basis is $5,000 after deducting the loss.
e. None of these choices are correct.

Answer 1

c. Dmitri has a stock basis of $60,000 and a loan basis of $20,000 before deducting any loss.

Step-by-step explanation:

Given

Stock Basis = $60,000

Loan Basis = $20,000

Loss = $75,000

Note that: A non-recourse loan is a type of loan secured by collateral, which is usually property.

Because of this, his loan basis remains unchanged at $20,000.

However, due to the at-risk rules,

which prevent individuals from deducting more than their actual stake in a business, he can deduct only $60,000 of S corporation losses; this will reduce his stock basis to zero.