Question

On January 2, 2019, Tim loans his S corporation $10,000. By the end of 2019, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2020, the company's operating income is $10,000. The company makes 2020 distributions of $8,000 to Tim. He reports a(n):

Answer 1

$2,000 long term capital gain

Explanation:

As per the data given in the question,

Stock basis = $10,000

At the end stock basis = 0

Basis reduced to = $8,000

Operating income = $10,000

Company makes distribution = $8,000

Here, The distribution will be reduced from stock basis

= $10,000 - $8,000

= $2,000 long term capital gain

Hence, he states that it leaves $2,000 as stock basis.