Lisa, a single taxpayer, owns 100% of Capsule Corporation, an S corporation. She has a $50,000 stock basis for her investment on January 1 of the current year (Year 1). During the first 11 months of Year 1, Capsule reports an ordinary loss of $55,000. The corporation expects an additional $10,000 loss for December. Lisa earn $260,000 of ordinary income from her other activities in Year 1. She expects her other income to decline to $150,000 in Year 2 and continue at that level in future years. The corporation expects Year 2 losses to be only $10,000. Capsule projects a $14,000 profit for Year 3 and each of the subsequent four years.

Requirements:

What advice can you offer Lisa about using her Capsule losses and retaining S corporation status in future years? How would your answer change if Lisa expected her income from other activities to be $35,000 in Year 1 and $260,000 in Year 2?