Rosa contributes $50,000 to Flip-Co in exchange for a 10% ownership interest. Rosa materially participates in Flip-Co's business.
Flip-Co incurs a loss of $900,000 for the current tax year. Entity liabilities at the end of the year are $700,000. Of this amount, $150,000 is for recourse debt, and $550,000 is for nonrecourse debt.
a. Assume that Flip-Co is a partnership. How much of Rosa's share of the loss can she deduct for the year on her individual tax return? What is Rosa's basis for her partnership interest at the end of the year?
b. Assume that Flip-Co is a C corporation. How much of Rosa's share of the loss can she deduct for the year on her individual tax return? What is Rosa's basis for her stock at the end of the year?