Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker's basis in Alpha was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for the year. Alpha distributed $30,000 in cash to Baker during the year.
What amount of the $30,000 cash distribution is taxable to Baker ?
A) 0
B) 5,000
C) 7,000
D) 30,000
The answer is C. But I am confused with it. In my mind, the new basis = old basis + income - distribution - loss, (distribution cannot exceed basis, loss cannot exceed basis), the order to consider is first income, then distribution, then loss. Therefore, the new basis before distribution = 25,000+1,000=26,000, so 26,000 should be return of basis, which is non-taxable. 4,000 is capital gain + 1,000 ordinary income are taxable (total is 5,000 taxable)
Where am I wrong ? Thank you!!!