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REG CPA Practice Questions: S Corp Debt Basis and Stock Basis
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions teaching how to calculate S Corp shareholder debt basis and stock basis. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-how-to-calculate-s-corp-shareholder-debt-basis/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:49 Question 1: Calculating Debt Basis 02:26 Question 2: Learning More About Debt Basis 04:51 Question 3: Calculating Debt Basis Again 06:07 Question 4: Calculating Stock Basis 08:59 Question 5: Distributions Exceeding Tax Basis 11:59 Pillar Topics
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Welcome to another reg walkthrough video. I'm Logan, and in today's video, we're going to be going over
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S-Corporation shareholder debt basis, and we're going to be doing that the Superfast CPA way
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which is diving straight into questions to learn the material. If you don't know much about our
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strategies and you want to learn more, make sure you go to superfast cpa.com and check out our free
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one-hour webinar training. We teach the key ingredients to passing the CPA exam. Again, it's one hour
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it's free and it will save you so much time struggling with your process. Make sure you go check it out
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The link will be in the description. Also, if you like the idea of going through questions to learn
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the material, make sure you check out our super fast CPA app, where we not only have audio notes and
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review notes, but five question mini quizzes that you can easily access on your phone all
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throughout your day to continue practicing. With that said, let's dive straight into the questions
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Okay, here is question one. Karen is a shareholder in Green Energy Solutions, Inc., an S corporation
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At the beginning of the year, Karen's stock basis was $50,000, and her debt basis due to loans she made to the corporation was $25,000
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During the current tax year, the following transactions occurred. Karen loaned an additional $15,000 to the corporation, the corporation made a distribution of $20,000 to Karen
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The corporation repaid $5,000 of the principal on Karen's earlier loans, and also Green Energy Solutions reported a net loss of $30,000, which was allocated equally among its three shareholders, and the corporation received a bank loan of
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of $40,000, which Karen personally guaranteed but was not drawn upon by year-end
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Calculate Karen's debt basis in Green Energy Solutions, Inc. at the end of the year
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Okay, this is the first question of the video. You might not even know what debt basis is, and there's a lot of information here
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so let's go ahead and look at the answer to see how we can break this down. All right, and the answer is $35,000
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And here's how we calculate that. We start with the debt basis of $25,000, which it says right here
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and then we add the additional loan that Karen made for $15,000. thousand dollars and then we take away the principal repayment of loans by the corporation of
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five thousand dollars and then even though she guaranteed the loan they didn't actually draw any
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money from karen so she didn't actually loan any more money to the company so her end of the year
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debt basis is thirty five thousand dollars okay so we saw the calculation there we still need
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a little bit more of an explanation on how this works so let's go ahead and go to the next
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question to learn a little bit more about debt basis and get more context Okay, here is question two. John is a shareholder in Coastal Ventures, Inc., and S. Corporation
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At the beginning of the year, John had no debt basis. During the year, the following transactions occurred
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John loaned $20,000 to Coastal Ventures, which was formally documented with a promissory note
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specifying terms and interest. Later in the year, John loaned an additional $25,000 to the corporation
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under similar formal terms, and then Coastal Ventures made a principal repayment of $10,000 on the first loan during the year
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So we need to calculate John's debt basis in coastal ventures at the end of the year
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All right, based off the first question, you might be able to calculate this because it has
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pretty similar components and debt basis isn't that complicated. So if you'd like, go ahead and pause the video and see if you can get the correct calculation
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And when you're ready, come back and we will look at the answer together. Okay, and the answer is $35,000 again, but for different reasons
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So let go ahead and look at the calculation and it looks like there a better explanation in this question So let go ahead and look at it Initial debt basis didn start with any obviously He gave a loan to the company so that gave him
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He also made another loan of $25,000, and then they repaid $10,000 off of the first loan
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leaving a debt basis of $35,000. So let's read this explanation. Debt basis in an S corporation refers to the amount of money a shareholder has lent to the corporation
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tracked separately from their equity investment or stock basis. It's crucial for determining the tax implications of the corporation's losses
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distributions, and repayments. When a shareholder lends money to the S-Corp, their debt basis increases by the amount of the loan
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allowing them to claim deductions for their share of the corporation's losses up to the total of their stock and debt basis combined
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This is called tax basis. If the corporation repays any portion of these loans
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the shareholder's debt basis decreases by the amount of the repayment. So debt basis is pretty straightforward
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If a shareholder loans money to the S corporation, they then have debt basis
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And they increase their debt basis if they loan more money to the company
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And their debt basis will decrease if and when the company repays part of that loan
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It's pretty simple. It is different than stock basis, though. And we are going to talk a little bit about stock basis in this video
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But for the purposes of the CPA exam, debt basis, not super complicated
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it's their loans and it decreases when it's repaid. Let's go ahead and go to the next question to learn a little bit more
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Okay, here is question three. Alice is a shareholder in Seaside Enterprises, Inc. NS Corporation
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At the beginning of the year, Alice's debt basis was $50,000 due to previous loans she made to the corporation
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During the current year, the following transactions occurred. Seaside Enterprises repaid $20,000 of the principal on Alice's loans
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Alice made no new loans to the corporation this year. The corporation did not distribute any funds to shareholders this year
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no other transaction affecting Alice's basis, calculate Alice's debt basis in Seaside Enterprises
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Inc. at the end of the year. Okay, this question is just to hit home what we've learned in the
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previous two questions before we move on to something else. So you should know how to do this by now
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Go ahead and pause the video. Do the calculation. You might not even have to pause the video
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You probably already know how, you probably already know what the answer is. But when you're ready
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come back and we'll look at the answer. Okay, and the answer is $30,000. And it's pretty simple
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Starting debt basis was $50,000 as it mentioned at the beginning of the question
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Principal repayment was $20,000. That reduces the debt basis by $20,000. And that's all that happened in the whole year
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So Alice's debt basis is $30,000 at the end of the year. Again, debt basis by itself, not super complicated
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Now let's go ahead and look at a little bit of stock basis and maybe stock basis and debt basis together
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All right, here is question four. Marianne is a shareholder in Clearview Designs Inc. 활 corporation. At the beginning of the year
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Marianne's stock basis was $70,000, and her debt basis was $20,000. Throughout the year
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the following transactions occurred. Clearview designs reported a net income of $40,000, allocated
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equally among its four shareholders. Mary Ann made an additional investment of $10,000 in exchange
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for more stock. Mary Ann received a distribution of $25,000. The corporation repaid $5,000 of the
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principal on a loan directly from Marianne. and Marianne personally guaranteed a new bank loan for the corporation totaling which was not drawn upon by year end So this looks pretty similar to the first question However the question wants us to calculate Marianne stock basis in Clearview Designs Inc at the end of the year
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Okay, so again, stock basis is not the same as debt basis. If you don't really know how to calculate stock basis, let's go ahead and look at the answer
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If you do understand stock basis, see if you can calculate the correct answer based off of now knowing what debt
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basis is, and now you probably know what would not go into debt basis and what would not go into
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stock basis and so on. But with that said, let's go ahead and look at the answer. Okay, and the answer is
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$65,000. So the stock basis would start at $70,000, like it said at the beginning. Then the
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net income allocated to her would increase it. The additional investment in stock, so again, this is
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not a loan. This is her investing money to have more stock in the company. And then distributions do
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decrease stock basis. They may not decrease debt basis, but we'll talk about that in the next
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question. So the end of the year's stock basis is $65,000. And as for the loan repayment and personal
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guarantee, these affect the debt basis, not the stock basis. Now let's read a little bit more about
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stock basis specifically. An S-corporation stock basis represents the amount of the shareholder's economic
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investment in the corporation, tracked for tax purposes. It begins with the initial capital contribution
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or the cost of acquiring the stock, and then adjusts upward for additional capital contributions
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and the share of the corporation's income. It also adjusts downward for distributions received
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from the corporation, non-deductible expenses, and the shareholders' share of the corporation's
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losses. This basis is crucial because it limits the amount of losses shareholders can deduct
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on their personal tax returns and determines the tax implications of distributions and stock
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dispositions. Essentially, maintaining an accurate stock basis ensures that shareholders can maximize
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their tax benefits related to corporate losses and distributions. So again, stock basis is probably
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more what you would typically think of, you know, when you invest in a company, and then depending
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on how well the company does, your basis will go up and down in that. But it is separate from
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debt basis when it comes to S corporations. Now that we understand debt basis and stock basis
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pretty well, let's go ahead and do the last question and see how they interact together
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Okay, here is question five. Linda is a shareholder in Blue Tech Innovations, Inc., NS Corporation
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At the beginning of the year, Linda's stock basis was $40,000, and her debt basis was $15,000 due to previous loans she made to the corporation
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During the year, the following transactions occurred. Blue Tech Innovations reported a net profit of $20,000, allocated equally among its four shareholders
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Linda received a distribution of $55,000, and there were no loans made by Linda or repayments of existing loans during the year
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assuming no other transaction affecting Linda's basis, calculate how the distribution affects
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Linda's stock and debt basis at the end of the year. Okay, we know how stock basis and debt basis
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work essentially from the other questions. So if you want, go ahead and take a guess or see if you
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can figure out what the correct answer would be how distributions can affect stock basis and debt
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basis. But either way, let's go ahead and look at the answer. Okay, and the answer is she would have
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no stock basis left and she would only have $5,000 worth of debt basis remaining. So let's look at the
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calculation and the explanation So obviously stock basis started at She gets an increase of because she a 25 shareholder And then the distribution received was So you would think
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maybe that would leave her stock basis at negative $10,000. But you actually can't have a negative
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stock basis. And let's read that right here. However, since the stock basis cannot be negative
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it falls to $0. And the remaining distribution that cannot be covered by the stock basis
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which was $10,000, must reduce the debt basis. So that's when you would take the debt basis, less the distribution, and that leaves you with a debt basis at the end of the year of $5,000
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And here's what that means. Here's the tax implications. The excess distribution amount that reduces the debt basis may be taxable as a capital gain to Linda if her overall basis, stock plus debt, does not cover the distribution
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So basically what that's saying right there is if a distribution exceeds the whole tax basis
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So that means it exceeds stock basis and debt basis, any amount
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that is over that tax basis amount, and again, tax basis is stock basis and debt basis together
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any amount over that tax basis would be taxed as a capital gain. And then as far as future
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loss deductions, a reduced debt basis limits Linda's ability to deduct future losses
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passed through from the S corporation until her basis is restored either through additional
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contributions or net income allocations. Now, we're not going to dive super deep into restoring
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basis, but basically, if you no longer have debt or stock basis, before you can take losses
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again, you have to gain back debt and stock basis. Again, we're not really going to dive into
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that in this video, but that's how it works. When stock and debt basis are totally exceeded
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and again, that's your total tax basis, then the amount that exceeded the stock basis and the
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debt basis is considered a capital gain. All right, now that we've done those five questions
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let's finish out the video by doing one more part of the Superfast CPA. strategy, which is something called pillar topics. Now the idea behind pillar topics is, as you're
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going through questions, to learn the material, you will notice the topics that are obviously
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important. These are the things that keep coming up in the questions that you've seen like three, four, five times throughout the questions, and you know they're important based off
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of your review course questions. So let's go ahead and go to the pillar topics for this video
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And here are the pillar topics. Debt basis is different from stock basis. Debt basis is
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essentially when a shareholder loans money to the S corporation. It is decreased when the
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S-Corp makes payments on the debt. Pretty much that's it. Debt basis is pretty simple
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Stock basis is more typically what we think of. It's when a shareholder buys into the corporation
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It is increased and decreased by normal business activities of the S-corporation and also distributions
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Debt basis and stock basis together make up tax basis. If distributions to a shareholder are greater
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than their tax basis, then the amount that was greater can be taxed as a capital gain
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All right, and that is it for this video. Those are some of the most basic things that you need to know for the CPA exam when it comes
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to S-Corporation shareholder debt basis and stock basis. Thanks for watching. Make sure you go check out our free one-hour webinar training on superfast cpa.com
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Again, we teach the key ingredients to passing the CPA exam. It's not something you want to miss
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Also, if you'd like to going through questions to learn the material, make sure you check out our Superfast CPA app
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where we have five question mini quizzes that you can easily access on your phone
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all throughout the day to continue practicing. If you liked this video, make sure you like it and leave a comment
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I hope this was helpful, and I will see you in the next video. video
#Debt Management