In the current year, Harold and Faye form Entity Company by each contributing $50,000 to the company in exchange for a 50% ownership interest. In addition, the company borrows $40,000 from First Bank. In the current year, the company incurs a $110,000 loss from operations.
a. How much of the loss can each shareholder deduct in the current year if Entity is an S Corporation, and what is each shareholder’s basis in his or her stock at the end of the year?
b. How much of the loss can each partner deduct in the current year if Entity is a partnership, and what is each partner’s basis in his or her partnership interest at the end of the year?