Suppose that at the beginning of 2020 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2020, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How muchtotal income does Jamaal report in 2020 from these transactions?
A)$0
B)$4,000
C)$6,000
D)$7,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Jamaal's total basis in the S corporation is $11,000 ($1,000 stock basis + $10,000 debt basis).

His share of S corporation income is $4,000.

The $7,000 distribution is tax-free to the extent of his $10,000 debt basis. Therefore, $7,000 of the distribution is tax-free, and $3,000 is taxable.

Since Jamaal's share of the S corporation income ($4,000) is less than the taxable portion of the distribution ($3,000), his total income for 2020 is $6,000 ($4,000 + $3,000 - $1,000 basis reduction for the S corporation income).

Therefore, the correct answer is (C) $6,000.

Suppose That at the Beginning of 2020 Jamaal's Basis in His