CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, an S corporation, originally issued stock for $50,000. In the current year, the S corporation's ordinary business income is $80,000, and it distributes $30,000 to its sole shareholder. The shareholder's basis in their S corporation stock at the beginning of the year was $100,000. What is the shareholder's basis in their S corporation stock at the end of the year?
- A$210,000
- B$180,000
- C$70,000
- D$150,000
Show answer & explanationAnswer & explanation
Correct answer: D. $150,000
Shareholder basis is increased by ordinary business income and decreased by distributions. Beginning basis ($100,000) + Ordinary Income ($80,000) - Distributions ($30,000) = $150,000 ending basis. The original issuance price of $50,000 is irrelevant for the current year's basis calculation if the beginning basis is already provided.
Why the other options are wrong
- A. Incorrect. This adds all values without proper adjustment.
- B. Incorrect. This calculation would be if there were no distributions.
- C. Incorrect. This calculation would be if income was $0 and distribution reduced basis from $100,000.
S Corp Shareholder Basis Adjustments
A shareholder's basis in S corporation stock is increased by income items and decreased by loss/deduction items and distributions.
- Increases for ordinary income, capital gains, tax-exempt income
- Decreases for losses, deductions, nondeductible expenses, distributions
- Basis cannot go below zero
Memory trick: Basis: up for income, down for loss, down for cash out, that's the boss.