At the beginning of year 1, Bill and Cindy form an S-corp and are equal shareholders, each gave $5,000 in exchange for stock. Cindy loaned the corp another $5,000 on June 30th of year. The corporation had an ordinary loss in its first year of $12,000 and ordinary income in its second year of $15,000. Assume that all parties use a calendar based taxable year and that neither the passive nor at-risk limitations are applicable. How much of the loss can each shareholder deduct on their individual tax returns?

A. Each may deduct $6,000 of the loss because the passive and at-risk limitations are not applicable.

B. Bill may deduct $5,000 of the loss and Cindy may deduct $6,000 of the loss.

C. Bill may only deduct $5,000 of the loss, but Cindy can deduct $7,000 because she bears the economic risk of loss for any amounts not contributed by Bill on account of having made a loan to the S-corporation.

D.Each may deduct only $5,000 of the loss because their deduction is limited to their equity contributions.