Increase the suspended loss amount available to pete

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Reference no: EM13672708

Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2014. The company generated a $74,000 NOL in 2013 and another NOL of $43,000 in 2014. Orange recorded no other transactions for the year.
At all times in 2013 and 2014, the stock of the corporation is owned by the same four shareholders, each owning 25% of the stock. Pete, one of the shareholders, holds a $6,020 basis in the Orange stock at the beginning of 2014. Identify the Federal income
tax issues that Pete faces.

My Answer:
Pete -25% shareholder
25% Share
2013 NOL $74,000 $18,500

2014 NOL $43,000 $10,750
Limited to Tax Basis $6,020
2014 Excess NOL carried forward $4,730

Pete is allocated $10,750 of the 2014 NOL. NOL cannot exceed tax basis thus Pete is allowed to deduct $6,020 (his tax basis) loss on his personal tax return. The remaining $4,730 is suspended until Pete creates an additional basis to absorb this loss. Pete can increase his basis by either making an additional investment in the company (stock basis) or loan the company money (debt basis). Alternatively, he can wait for the company to make enough profit, to enable him to deduct his suspended loss.
Should Pete sell his stock before he could absorb the loss he loses the suspended loss amount.
If any of his allocated 2013 NOL were not absorbed then this would increase the suspended loss amount available to Pete.

Do you agree with my answer?

Reference no: EM13672708

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