Part 2 S Corporations question: Kay's S corporation stock basis at the start

Part 2S Corporations

Kay's S corporation stock basis at the start of 2025 is $10,000; she has no debt basis. For 2025 her share of ordinary loss is $8,000 and she received a $6,000 distribution. How much of the loss is allowed in 2025?

A $0
B $2,000
C $4,000
D $8,000

Show the answer and explanation

Answer: C. $4,000

Distributions reduce basis before losses: $10,000 - $6,000 = $4,000 remains for the loss. Kay deducts $4,000; the other $4,000 is suspended. Because the distribution did not exceed basis, it is tax-free. Source: IRC 1366(d)(1), 1368(d); Treas. Reg. 1.1367-1(f). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Applying losses before distributions, which would make part of the distribution taxable.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.