[ykim32]

I don’t understand why the capital gain(excess amount above SH’s basis) is not included in SH’s gross income.

Q. Evan, an individual, has a 40% interest in EF, an S corp. At the begging of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amout should Evan include in gross income?

a. $38,000

b. $40,000

c. $80,000

d.$118,000

Answer: C Shareholders then pay tax on their pro rate share of income, regardlness of wheter or not any income actually was distributed to them. $200,000 X40%=$80,000

In my short thought, I understood that the 40% of $100,000 = 40,000 can be allocated to SH’s gross income. So, $3,800 above basis $2,000 can be included in SH’s gross income, as Capital gain. I don’t know which part is wrong in my approach. Would you please correct what I am missing? I need your advise and wisdom, please.

[youngd8]

The question is asking for gross INCOME. Remember S corp is treated like a partnership, so distributions only effects basis.

[ykim32]

Distribution is treated as dividend income? Isn't it? I believed that cash distribution and property distribution are similar to cash/property dividend.

[Anonymous]

You're forgetting about the aaa account

[leglock]

The income of the S-corp, whether distributed or not is income. You have to recognize 80,000 as ord income. This would increase your basis to 82,000.

The distribution you received woould have been 40,000 (40% of 100K) and would have reduced your basis to 42,000 and would not have been taxable.

[WeWillSee]

Leglock is right, $80,000 would be included in gross income (and increase basis), since SH have to pay taxes on their share of s-corp income whether or not it's distributed, and $40,000 would not be included in gross income because the SH has already paid taxes on that amount via ordinary income.

Taxes would be paid on excess distributions if the amount distributed was greater than the amount of basis the SH had – which is not the case in this question.

[Author]

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