SEE - Special Enrollment Exam Quiz: S Corporation Income And Basis
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S Corporation Income And BasisQuestion 1 of 15

Rosa formed an S corporation in 2025 by transferring land to the corporation in a transaction qualifying under IRC § 351. She received all of the stock. The land had an adjusted basis to Rosa of $60,000 and a fair market value of $100,000. The corporation assumed an $80,000 recourse mortgage on the land. Rosa received no other property.

What is Rosa's initial adjusted basis in the S corporation stock?

Her initial adjusted basis in the stock is $0.
Her initial adjusted basis in the stock is $20,000.
Her initial adjusted basis in the stock is $60,000.
Her initial adjusted basis in the stock is $100,000.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: S Corporation Income And Basis

Practice S Corporation Income And Basis in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on S Corporation Income And Basis, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

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Question 1

Rosa formed an S corporation in 2025 by transferring land to the corporation in a transaction qualifying under IRC § 351. She received all of the stock. The land had an adjusted basis to Rosa of $60,000 and a fair market value of $100,000. The corporation assumed an $80,000 recourse mortgage on the land. Rosa received no other property.

What is Rosa's initial adjusted basis in the S corporation stock?

  1. Her initial adjusted basis in the stock is $0. (correct answer)
  2. Her initial adjusted basis in the stock is $20,000.
  3. Her initial adjusted basis in the stock is $60,000.
  4. Her initial adjusted basis in the stock is $100,000.
Explanation: IRC §§ 358(a), 357(c). In an otherwise tax-free § 351 transfer, stock basis is the adjusted basis of the property transferred, decreased by liabilities assumed by the corporation, and increased by any gain recognized. Because the $80,000 mortgage exceeds the $60,000 adjusted basis, Rosa recognizes $20,000 of gain under § 357(c). Her stock basis is therefore $60,000 - $80,000 + $20,000 = $0. Choice B treats basis as fair market value less the mortgage. Choice C ignores the liability assumption. Choice D uses fair market value as basis.

Question 2

At the beginning of 2025, Priya owned all of the stock of an S corporation that has never had accumulated earnings and profits. Her adjusted basis in the stock was $0, but she had a $20,000 adjusted basis in a loan she had made to the corporation. The corporation had no income or loss in 2025 and distributed $30,000 cash to Priya. She had held the stock for more than one year.

What are the tax consequences of the distribution to Priya for 2025?

  1. She has a $30,000 dividend, and her loan basis is reduced to $0.
  2. The distribution is tax-free to the extent of her $20,000 loan basis, and she has a $10,000 long-term capital gain.
  3. She has a $10,000 long-term capital gain, and her loan basis is reduced to $0.
  4. She has a $30,000 long-term capital gain, and her loan basis remains $20,000. (correct answer)
Explanation: IRC §§ 1368(b), 1367(a)(2)(A). A distribution from an S corporation with no accumulated earnings and profits is applied against and reduces the shareholder's stock basis, and the excess is treated as gain from the sale or exchange of stock. A distribution does not reduce the basis of shareholder debt. Priya had $0 stock basis, so the entire $30,000 distribution is gain, and because she held the stock for more than one year it is long-term capital gain. Her $20,000 loan basis remains unchanged. Choice A incorrectly treats the distribution as a dividend and reduces the debt. Choices C and B incorrectly use the loan basis to absorb the distribution.

Question 3

At the beginning of 2025, Jade owned 50% of an S corporation's outstanding stock, and her adjusted basis in that stock was $40,000. The corporation is a calendar-year taxpayer. For 2025, the corporation had $36,000 of ordinary income and made no distributions. On December 31, 2025, after all 2025 items had been allocated to the shareholders, Jade sold her entire 50% interest for $70,000.

What was Jade's adjusted basis in the stock immediately before the sale, and what was her gain or loss on the sale?

  1. Her basis was $76,000, and she recognized a $6,000 loss.
  2. Her basis was $40,000, and she recognized a $30,000 gain.
  3. Her basis was $58,000, and she recognized a $12,000 gain. (correct answer)
  4. Her basis was $58,000, and she recognized a $30,000 gain.
Explanation: IRC §§ 1366(a), 1367(a)(1); IRC § 1001(a). A shareholder takes into account her pro rata share of S corporation ordinary income (nonseparately computed income) and increases her stock basis by that share. Jade's share of the $36,000 ordinary income is $18,000, so her basis before the sale is $40,000 + $18,000 = $58,000. Her gain is the $70,000 amount realized less her $58,000 basis, or $12,000. Choice B fails to increase basis for the passed-through income before measuring gain. Choice A adds the corporation's entire $36,000 of income to her basis. Choice D uses the correct basis but computes the gain using the $40,000 beginning basis rather than the $58,000 adjusted basis; $70,000 − $58,000 is $12,000.

Question 4

Priya owns all of the stock of an S corporation. Her adjusted basis in the stock at the beginning of 2025 was $12,000, and the corporation owed her nothing. During 2025, the corporation borrowed $60,000 from a bank; Priya personally guaranteed the loan. The corporation made no distributions in 2025 and allocated a $28,000 ordinary business loss to Priya. Priya made no payments under the guarantee in 2025.

How much of the 2025 loss may Priya deduct, and what is her end-of-year stock basis?

  1. She may deduct $28,000 and end with a $0 stock basis; the guarantee is treated as an indebtedness of the corporation to her.
  2. She may deduct $12,000 and end with a $0 stock basis; the remaining $16,000 is suspended and carried forward. (correct answer)
  3. She may deduct $12,000 and end with a $0 stock basis; the remaining $16,000 is permanently disallowed.
  4. She may deduct $28,000 and end with a $0 stock basis; the guarantee is included in her amount at risk.
Explanation: IRC § 1366(d)(1). A shareholder may deduct an S corporation loss only to the extent of the adjusted basis in stock plus the adjusted basis in indebtedness of the corporation to the shareholder. A shareholder's guarantee of corporate debt, standing alone, is not an indebtedness of the corporation to the shareholder and does not create basis. She made no payment under the guarantee, so her only basis is the $12,000 stock basis. The remaining $16,000 loss is carried forward under IRC § 1366(d)(2). Choice A treats the guarantee as debt basis. Choice C misstates the carryover as permanent. Choice D confuses the at-risk rules with the basis limitation; a mere guarantee is not an amount at risk and does not create basis.

Question 5

At the beginning of 2025, Omar owned all of the stock of an S corporation. His adjusted basis in the stock was $30,000, and the corporation owed him nothing. For 2025, the corporation allocated to Omar $8,000 of tax-exempt interest, $5,000 of ordinary business income, a $4,000 charitable contribution, and $3,000 of nondeductible penalties. The corporation made no distributions.

What is Omar's adjusted basis in the S corporation stock at the end of 2025?

  1. $39,000
  2. $28,000
  3. $36,000 (correct answer)
  4. $43,000
Explanation: IRC § 1367(a). A shareholder's stock basis is increased by pass-through income items, including tax-exempt interest and ordinary business income, and decreased by pass-through deductions and by nondeductible expenses not properly chargeable to capital account. Omar's end-of-year basis is $30,000 + $8,000 + $5,000 - $4,000 - $3,000 = $36,000, so Choice C is correct. Choice B omits the tax-exempt interest increase. Choice A omits the nondeductible penalty decrease. Choice D omits both the charitable contribution decrease and the nondeductible penalty decrease.

Question 6

At the beginning of 2025, Kira owned all of Alden, Inc., an S corporation. Her adjusted basis in Alden stock was $15,000, and her basis in a $25,000 promissory note from Alden was $25,000. Alden had no accumulated earnings and profits. During 2025, Alden reported an ordinary loss of $60,000 and distributed $10,000 cash to Kira. Assume the at-risk and passive activity limitations do not apply.

What amount of Alden's 2025 loss may Kira deduct, and what is her basis in the Alden note after applying the loss?

  1. $5,000 loss; $25,000 note basis
  2. $30,000 loss; $0 note basis (correct answer)
  3. $40,000 loss; $0 note basis
  4. $60,000 loss; $0 note basis
Explanation: IRC § 1366(d)(1) and Treas. Reg. § 1.1367-1(f). The $10,000 distribution is a nondividend distribution because Alden has no accumulated earnings and profits, so it reduces stock basis before losses are applied: $15,000 - $10,000 = $5,000. Kira's total loss limit is $5,000 stock basis plus $25,000 note basis, or $30,000. The loss reduces stock basis to zero, then reduces note basis to zero under IRC § 1367(b)(2); the remaining 30,000issuspendedandcarriedoverunderIRC§1366(d)(2).ChoiceA(30,000 is suspended and carried over under IRC § 1366(d)(2). Choice A (5,000) limits the deduction to the stock basis remaining after the distribution and does not use the 25,000notebasis.ChoiceC(25,000 note basis. Choice C (40,000) applies the loss before reducing stock basis for the distribution. Choice D ($60,000) ignores the basis limitation of IRC § 1366(d)(1).

Question 7

On February 28, 2025, Greg purchased a 25% stock interest in Osprey, Inc., an S corporation, from Faith, who had owned that interest since formation. Osprey is a calendar-year S corporation and did not make a terminating-interest election under § 1377(a)(2). Greg paid $40,000 for the stock and still owned it on December 31, 2025. Osprey had $146,000 of ordinary income for 2025, no separately stated items, and made no distributions.

What amount of Osprey's 2025 income is allocated to Greg, and what is his stock basis on December 31, 2025?

  1. $30,417 of income; $70,417 basis
  2. $30,600 of income; $40,000 basis
  3. $30,600 of income; $70,600 basis (correct answer)
  4. $36,500 of income; $76,500 basis
Explanation: IRC § 1377(a)(1); Treas. Reg. § 1.1377-1(a)(2); IRC § 1367(a)(1)(A). Because Osprey did not make a § 1377(a)(2) closing-of-the-books election, its 2025 items are allocated per share, per day. The daily ordinary income is $146,000/365 = $400. Greg's 25% share is $100 per day for 306 days (March 1 through December 31). Faith is treated as the shareholder for February 28, the day of transfer, so Greg's ownership begins March 1. Thus Greg's income is $100 × 306 = $30,600. This pass-through income increases Greg's stock basis: $40,000 + $30,600 = $70,600. Choice A approximates by months rather than the statutory daily method. Choice B computes the correct income share but fails to increase stock basis by the pass-through income. Choice D allocates a full 25% interest to Greg for the entire year, ignoring Faith's 59-day ownership period.

Question 8

At the beginning of 2025, Mateo owned all of the stock of an S corporation that had no accumulated earnings and profits. His adjusted basis in the stock was $30,000, and the corporation owed him nothing. During 2025, the corporation distributed $25,000 cash to Mateo and allocated a $40,000 ordinary business loss to him. Mateo materially participates in the business, and his amount at risk is not a limiting factor for 2025.

How much of the loss may Mateo deduct for 2025, and what happens to any disallowed loss?

  1. He may deduct $30,000, carry over $10,000, and end the year with a $0 stock basis; the distribution is not taxable.
  2. He may deduct $5,000, carry over $35,000, and end the year with a $0 stock basis; the distribution is not taxable. (correct answer)
  3. He may deduct $30,000, carry over $10,000, and report a $25,000 capital gain on the distribution; his end-of-year stock basis is $0.
  4. He may deduct $40,000, carry over $0, and end the year with a $0 stock basis; the distribution is not taxable.
Explanation: IRC §§ 1366(d)(1), 1367(a), 1368(b); Treas. Reg. § 1.1367-1(c). A tax-free S corporation distribution is taken into account before current-year losses. Because the corporation had no accumulated earnings and profits, the $25,000 cash distribution is not taxable and reduces Mateo's stock basis from $30,000 to $5,000. The $40,000 ordinary loss is allowed only to the extent of his remaining $5,000 stock basis, so $5,000 is deductible and $35,000 is suspended and carried over under IRC § 1366(d)(2). Choice A applies the loss before the distribution, incorrectly treating the distribution as still tax-free. Choice C also applies the loss before the distribution and then treats the distribution as a taxable capital gain. Choice D ignores the stock-basis limitation entirely.

Question 9

In 2025, Paula and Ramon form PR, Inc., an S corporation. Paula transfers equipment with an adjusted basis of $40,000 and a fair market value of $100,000 to PR in exchange for 70% of its stock, and PR assumes a $30,000 liability on the equipment. Ramon transfers $30,000 cash for the remaining 30% of the stock. The transfer qualifies under § 351, and no gain is recognized.

What are Paula's basis in her PR stock and PR's basis in the equipment?

  1. $10,000 stock basis; $40,000 corporate basis (correct answer)
  2. $10,000 stock basis; $100,000 corporate basis
  3. $40,000 stock basis; $40,000 corporate basis
  4. $70,000 stock basis; $40,000 corporate basis
Explanation: IRC §§ 357(a), 357(c), 358(a) and (d), and 362(a). Under § 357(a), PR's assumption of the $30,000 liability is not treated as money or other property received, so it does not cause gain recognition. Section 357(c) does not apply, because the $30,000 liability does not exceed Paula's $40,000 basis in the equipment. For computing Paula's stock basis, however, § 358(d) treats the assumed liability as money received. Her stock basis is $40,000 − $30,000 = $10,000. Under § 362(a), PR takes Paula's $40,000 basis in the equipment, increased by gain she recognized, which is $0; the liability assumption does not reduce the corporation's basis. Choice A is correct. Choice B is wrong because a corporation receiving property in a § 351 exchange takes a carryover basis, not the $100,000 fair market value. Choice C is wrong because it ignores the § 358(d) reduction of Paula's stock basis for the 30,000liability.ChoiceDiswrongbecauseitusestheequipment′snetfairmarketvalue(30,000 liability. Choice D is wrong because it uses the equipment's net fair market value (100,000 − $30,000 = $70,000) as stock basis; stock basis starts from the adjusted basis of the property transferred.

Question 10

At the beginning of 2025, Nolan owned all of the stock of an S corporation. His adjusted basis in the stock was $0, and his adjusted basis in a $25,000 loan he made to the corporation was $10,000, reduced by losses in prior years. For 2025, the corporation allocated to Nolan $18,000 of ordinary income, a $7,000 capital loss, and a $3,000 cash distribution. The corporation made no other distributions or loans.

What are Nolan's adjusted bases in the stock and in the loan at the end of 2025?

  1. His basis in the stock is $0, and his basis in the loan is $18,000. (correct answer)
  2. His basis in the stock is $8,000, and his basis in the loan is $10,000.
  3. His basis in the stock is $0, and his basis in the loan is $25,000.
  4. His basis in the stock is $8,000, and his basis in the loan is $18,000.
Explanation: IRC §§ 1367(a), 1367(b)(2); Treas. Reg. § 1.1367-2(c). For 2025, Nolan's increases in basis are the $18,000 of ordinary income. His decreases are the $3,000 distribution and the $7,000 capital loss, so the net increase is $8,000. Because his loan basis was reduced in prior years, this $8,000 net increase is applied to restore the loan basis before any increase in stock basis. The loan basis therefore becomes 18,000(18,000 (10,000 + $8,000), and the stock basis remains $0. Choice B ignores the required debt-basis restoration, applies the income to stock, and leaves the loan at $10,000. Choice C restores the loan but omits the $7,000 capital loss. Choice D double-counts the $8,000 net increase by both restoring the loan and increasing stock basis.

Question 11

At the beginning of 2025, a taxpayer owned all of the stock of an S corporation that had no accumulated earnings and profits. Her adjusted basis in the stock was $40,000, and she had no basis in any corporate debt. For 2025, her Schedule K-1 reported $25,000 of ordinary business income, $3,000 of tax-exempt interest income, $2,000 of nondeductible penalties and fines, and an $8,000 cash distribution. What is the taxpayer's adjusted basis in the S corporation stock at the end of 2025?

  1. $55,000
  2. $58,000 (correct answer)
  3. $60,000
  4. $66,000
Explanation: IRC §1367(a) requires stock basis to be increased by the shareholder's share of taxable and tax-exempt income and decreased by nondeductible, noncapital expenses and by distributions not included in income. Choice B is correct: $40,000 + $25,000 + $3,000 − $2,000 − $8,000 = $58,000. Choice A omits the $3,000 tax-exempt interest increase; tax-exempt interest is a separately stated income item that increases basis even though it is not taxable. Choice C omits the $2,000 reduction for nondeductible penalties and fines. Choice D fails to reduce basis for the $8,000 distribution; although it is not taxable because it does not exceed basis, it is still a return of basis that reduces basis under §1367(a)(2)(A).

Question 12

At the beginning of 2025, a taxpayer owned all of the stock of an S corporation and her adjusted basis in the stock was $50,000. During 2025, the corporation reported $40,000 of ordinary business income (determined before any charitable contribution deduction). It also contributed to a qualified charity a long-term capital asset with an adjusted basis of $10,000 and a fair market value of $25,000. The contribution passed through to the taxpayer as a $25,000 charitable contribution deduction that she may use in full. The corporation made no distributions. What is the taxpayer's adjusted basis in the stock at the end of 2025?

  1. $65,000
  2. $55,000
  3. $90,000
  4. $80,000 (correct answer)
Explanation: IRC §1367(a)(2)(B). When an S corporation contributes appreciated property to charity, the shareholder's stock basis is reduced by her pro rata share of the adjusted basis of the contributed property, not by the fair market value or the separately stated charitable deduction. Choice D is correct: $50,000 + $40,000 − $10,000 = $80,000. Choice A reduces basis by the $25,000 fair market value of the property. Choice B also nets the $25,000 contribution deduction against current income before applying the $10,000 basis adjustment. Choice C ignores the required basis reduction for the contribution.

Question 13

At the beginning of 2025, a taxpayer owned all of the stock of an S corporation that had no accumulated earnings and profits. His adjusted basis in the stock was $15,000, and he had held the stock for more than one year. During 2025, the corporation had $20,000 of ordinary business income and distributed $50,000 cash to him. There were no other items. How should the taxpayer report the distribution for 2025?

  1. $15,000 is a nontaxable return of basis; $35,000 is long-term capital gain.
  2. $20,000 is a nontaxable return of basis; $30,000 is long-term capital gain.
  3. $35,000 is a nontaxable return of basis; $15,000 is long-term capital gain. (correct answer)
  4. The entire $50,000 is taxable as an ordinary dividend.
Explanation: IRC §§1368(b) and 1367(a). For an S corporation with no accumulated earnings and profits, a distribution is tax-free to the extent of the shareholder's adjusted stock basis, and the excess is treated as gain from the sale or exchange of stock. Choice C is correct: current-year ordinary income of $20,000 is included in income and increases the $15,000 beginning basis to $35,000, so $35,000 is a nontaxable return of basis and the remaining $15,000 is long-term capital gain. Choice A uses beginning-of-year basis rather than basis after current-year income. Choice B limits the nontaxable amount to current-year income, which is not the §1368(b) test. Choice D treats the distribution as an ordinary dividend, a result that requires accumulated earnings and profits, which the facts negate.

Question 14

An S corporation uses the calendar year and has two equal shareholders. On July 1, 2025, one shareholder sells all of his stock to the other. No election under §1377(a)(2) is made. The corporation's ordinary income for 2025 was earned unevenly, with most of it in the first six months. Which of the following is correct regarding the allocation of the corporation's 2025 ordinary income between the selling shareholder and the buying shareholder?

  1. It is allocated on a per-share, per-day basis over the entire year, regardless of when the income was actually earned. (correct answer)
  2. It is allocated by an interim closing of the books as of the sale date because the sale terminates the shareholder's entire interest.
  3. It is allocated in proportion to the cash distributions each shareholder received during the year.
  4. It is allocated entirely to the buying shareholder because the selling shareholder is no longer a shareholder at year-end.
Explanation: IRC §1377(a)(1). If no election is made under §1377(a)(2), S corporation items are allocated on a per-share, per-day basis over the entire taxable year without regard to when income was actually earned. Choice A is correct. Choice B describes the interim-closing-of-the-books method, which is available on a complete termination of a shareholder's interest only if the corporation and all affected shareholders consent; it is not mandatory. Choice C confuses distributions with the allocation of taxable income, and distributions are not the basis for allocating Schedule K-1 items. Choice D incorrectly looks only to year-end ownership.

Question 15

At the beginning of 2025, a taxpayer owned all of the stock of an S corporation. Her adjusted basis in the stock was $12,000, and her adjusted basis in a promissory note issued by the corporation to her was $9,000. She materially participates in the corporation's active business and is at risk for the full amount of her adjusted bases. For 2025, the corporation had an ordinary loss of $16,000 and made no distributions. What amount of the loss may the taxpayer deduct for 2025, and what are her bases in the stock and the note at the end of 2025?

  1. Deduct $16,000; stock basis $5,000; note basis $0.
  2. Deduct $12,000; stock basis $0; note basis $9,000.
  3. Deduct $16,000; stock basis $0; note basis $5,000. (correct answer)
  4. Deduct $9,000; stock basis $12,000; note basis $0.
Explanation: IRC §§1366(d)(1) and 1367(b)(2). A shareholder may deduct an S corporation loss only to the extent of combined basis in stock and debt, and the loss reduces stock basis before debt basis. Because the taxpayer materially participates and is at risk for the full amount of her bases, the basis limitation is the controlling shareholder-level limit. Choice C is correct: combined basis is $21,000, so the $16,000 loss is allowed in full; stock basis falls from $12,000 to $0 and note basis falls from $9,000 to $5,000. Choice A applies the loss to the note before the stock. Choice B ignores the note basis and limits the deduction to stock basis. Choice D uses only the note basis, leaving the stock basis unchanged.