Ive read this question 10x. Im either sleepy or missing something:
Graphite Corp. has been a calendar-year S corporation since its inception on January 2, Year 1. On January 1, Year 9, Smith and Tyler each owned 50% of the Graphite stock, in which their respective bases were $12,000 and $9,000. For the year ended December 31, Year 9, Graphite has $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, Year 9. What total amount of income from Graphite is includible in Smith's Year 9 adjusted gross income?
A.
$96,000
B.
$93,000
$43,000
CORRECT
D.
$40,000
In an S corporation, income is taxed when earned, not when distributed, unless distributions exceed owners' share of earnings + basis.
In this case, Smith gets 50% of ($80,000 taxable income + $6,000 nontaxable income). This yields a new basis of $55,000 ($12,000 beginning basis + $43,000 increase in basis = $55,000), which is greater than distributions. Thus, taxable income is limited to Smith's share of Graphite's taxable income, or 50% of $80,000. After the distribution, Smith's basis is $2,000 (basis of $55,000 reduced by a distribution of $53,000 = $2,000).
I guess my brain is always thinking about BASIS and not AGI (taxable income).
Do I have this righ?
C-CORP – adj AGI @ Distribution
S-CORP – adj AGI @ Earned income
– adj Basis @ business activity including non taxable income
– Exception: Liquidating Disbursement
Partnership – adj AGI @ Earned income
– adj Basis @ business activity & “at risk”
FAR - 05/2015
AUD - 75,11/2014
REG - 07/2015
BEC - 09/2015
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