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Yazmin's new business

Yazmin began a new business and set up her company as an S-Corporation. At formation, she contributed cash of $20,000 and property that had a value of $200,000 and basis of $150,000.

In year one, Yazmin also lent the S-corporation an additional $100,000 in a properly executed note. The corporation paid Yazmin $5,000 in interest payments on the note, but did not make any payments of principal. The S-corporation made an equity distribution to Yazmin of $50,000 at year end, and the S-corporation had ordinary losses of $180,000.

a. What is Yazmin's stock basis at the end of year one?
b. What is Yazmin's basis in her loan to the corporation at the end of year one?
c. What are the items of income and /or loss will Yazmin claim on her tax return in year one?

Solution Preview

The capitalization of the corporation with cash and property will follow the rules under Sec 351. That means the basis in the stock is $20,000 plus $150,000, her basis in the property at the time of transfer.

Section 351 allows for a tax free transfer to a controlled corporation and is mandatory provided the rules are met. The rules state that if the owner ...

Solution Summary

The solution first explains the rules for an S-corporation with respect to basis and taxation. Secondly, full calculations with explanations are given to determine the answers to the three questions.