Reference no: EM132443608

Sarah is the sole owner of Bluegrass Corporation.The basis and value of her stock investment in Bluegrass are approximately $100,000. In aaddition, she manages Bluegrass's operations on a full time basis and pays herself an annual salary of $40,000. Because of a recent downturn in business, she neefs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (e.g., inventory costs, salaries, and administrative expenses). Sarah believes that the $80,000 transfer can be structured in one of three wsys: as a capital contribution, as a loan made to protect her stock investment, or as a loan intended to protect her job. From a tax perspective, which alternative would be preferable in the event that Bluegrass's economic slide worsens and bankruptcy results? Explain your answer.