Tom owns 100% of Hammer Corporation, an S corporation. Tom has a $100,000 stock basis on January 1. Tom actively participates in Hammer’s business. Hammer operating results were not good in the current year, with the corporation reporting an ordinary loss of $175,000. The size of the loss required Tom to lend Hammer $50,000 on August 10 of the current year to provide funds needed for operations. The loan is secured by a Hammer Corporation note. Hammer rebounds during the next year and reports ordinary income of $60,000. Hammer repays the $50,000 note on December 15.
a. What amount of Hammer’s current year loss can Tom deduct on his income tax return?
b. What is Tom’s basis for the Hammer stock and note at the end of the loss year?
c. What income and deductions will Tom report next year from Hammer’s activities and the loan repayment?