Use of Losses by Shareholders. Tina, a single taxpayer, owns 100% of Rocket Corporation, an S corporation. She has an $80,000 stock basis for her investment on January 1 of the current year (Year 1). During the first 11 months of Year 1, Rocket reports an ordinary loss of $100,000. The corporation expects an additional $20,00O loss for December. Tina earns $325,000 of ordinary income from her other activities in Year 1. She expects her other income to decline to $125,000 in Year 2 and continue at that level in future years. The corporation expects Year 2 losses to be only $20,000. Rocket projects a $35,000 profit for Year 3 and each of the subsequent four vears
Use of Losses by Shareholders. Tina, a single taxpayer, owns 100% of Rocket Corporation, an S corporation. She has an $80,000 stock basis for her investment on January 1 of the current year (Year 1). During the first 11 months of Year 1, Rocket reports an ordinary loss of $100,000. The corporation expects an additional $20,00O loss for December. Tina earns $325,000 of ordinary income from her other activities in Year 1. She expects her other income to decline to $125,000 in Year 2 and continue at that level in future years. The corporation expects Year 2 losses to be only $20,000. Rocket projects a $35,000 profit for Year 3 and each of the subsequent four vears
Chapter15: Taxing Business Income
Section: Chapter Questions
Problem 2DQ
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Transcribed Image Text:Use of Losses by Shareholders. Tina, a
single taxpayer, owns 100% of Rocket
Corporation, an S corporation. She has an
$80,000 stock basis for her investment on
January 1 of the current year (Year 1).
During the first 11 months of Year 1, Rocket
reports an ordinary loss of $100,000. The
corporation expects an additional $20,000
loss for December. Tina earns $325,000 of
ordinary income from her other activities in
Year 1. She expects her other income to
decline to $125,000 in Year 2 and continue
at that level in future years. The corporation
expects Year 2 losses to be only $20,000.
Rocket projects a $35,000 profit for Year 3
and each of the subsequent four years.
What advice can you offer Tina about using
her Rocket losses and retaining S
corporation status in future years? How
would your answer change if Tina expected
her income from other activities to be
$75,000 in Year 1 and $325,000 in Year 2?
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