Stein Corporation, an S corporation, has 400 shares of stock outstanding. Chuck and Linda own an equal number of these shares, and both actively participate in Stein’s business. Chuck and Linda each contributed $60,000 when they organized Stein on September 9 of Year 1. Start-up losses during Year 1 resulted in Stein reporting a $210,000 ordinary loss. Stein’s activities have since become profitable, and the corporation voluntarily revokes the S election on March 1 of Year 2, with no prospective revocation date being specified. In Year 2, Stein reports $360,000 of taxable income ($30,000 per month). Stein makes no distributions to its shareholders in either year.
a. What amount of loss can Chuck and Linda deduct in Year 1?
b. What amount of loss do Chuck and Linda carry over to Year 2?
c. If Chuck reported only $5,000 of other business income in Year 1, what happens to the “excess” deductible S corporation losses?
d. What portion of the loss carryover from Part b can Chuck and Linda deduct in Year 2? What happens to any unused portion of the loss?
e. What advice can you offer to Chuck and Linda to enhance their use of the Stein loss?