Jonas is a 60% owner of Ard, an S corporation. At the beginning of the year, his stock basis is zero. Jonas’s basis in a $20,000 loan made to Ard and evidenced by Ard’s note has been reduced to $0 by prior losses. During the year, Jonas’s net share of Ard’s taxable income is $10,000. At the end of the year, Ard makes a $15,000 cash distribution to Jonas. After these transactions, what is Jonas’s basis in his stock, and what is his basis in the debt? What is Jonas’s recognized capital gain?

The person ‘J’ basis in the stock is $0.

The person ‘J’ basis in his debt is $0.

The capital gain arises as result of distribution is $5,000

Explanation:

J’ share of net income is $10,000 and the distribution of cash to person ‘J’ is $15,000, therefore, the person ‘J’ basis in his stock is first increased by $10,000 and then decreased by $15,000 but it cannot be negative, hence the person ‘J’ basis in his stock is reduced to $0.

During the current year the person ‘J’ share in taxable income is $10,000, hence there is no loss, So the shareholders ‘J’ basis on debt remains $0 or when the company starts making money again, the basis of loan will automatically increase.

The person ‘J’ basis in his debt is $0.

The capital gain on distribution of cash is calculated as follows;

Capital Gain = Cash Distribution -  J's basis in is stock

=$15,000 - $10,000

=$5,000

Therefore, the capital gain on distribution of cash is $5,000.

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough