S corp

  • Creator
    Topic
  • #1372755
    jessanqi
    Participant

    Wheeler Corporation, a Subchapter S corporation, has two equal shareholders. During the year, Wheeler had taxable income of $10,000. Included in the above is $20,000 excess net long-term capital gain over net short-term capital loss. Wheeler distributed $7,500 cash to each shareholder during the year. What amount should each shareholder report on his or her individual income tax return for the year as long-term capital gain passed through from Wheeler?

    The answer is $5,000.

    I don’t really understand this question, what does it mean “included in the above is $20,000 excess net LT capital gain over net short term capital loss?” the net capital should be also included in the taxable income right? Does this sentence is just a distraction?

    Can someone please kindly advise! thank you soso much!

Viewing 13 replies - 1 through 13 (of 13 total)
  • Author
    Replies
  • #1372806
    taxgeek83
    Participant

    I might be thinking through this wrong, but here's my thought:

    You have $20,000 in positive LTCG, and your net income – including the LTCG – is only $10,000. There's an expense, ordinary loss, something in there to net you out at only $10,000. The only positive income you have is the LTCG, which must be $10,000 if it's included in taxable income. Each shareholder gets 50% of that, or $5,000.

    In other words, the problem is netting both the “ordinary income/loss” from page 1 of the 1120S, as well as separately stated items (LTCG/STCL) from Schedule K. My assumption would be that ordinary income/loss was -$10,000, and LTCG over STCL is $20,000, which nets you at a positive $10,000 of taxable income. The $10,000 of taxable income characterized as LTCG, and gets passed through to the shareholders on their K-1s.

    #1372866
    Namstut
    Participant

    @jessanqi, is there an explanation to the $5,000 answer? What are you using? Becker? Ninja?



    @taxgeek83
    , I am not sure if I agree. Ordinary income and Capital gains/losses, both, short term and long term are listed separately on Partner's K-1 and also get entered separately on individual's personal tax return. Ordinary income goes on schedule 1040(E) and then entered in line 17 of schedule 1040. Capital gains/losses go on Schedule D and then transferred to line 13 of 1040.

    I don't know the answer to this problem and my initial thinking was the same as yours and I think it would be correct IF the net losses of $10,000 were ONLY capital losses.

    I would be interested to see the explanation to this question from the actual study material.

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

    #1372947
    taxgeek83
    Participant

    @Namstut – You're 100% correct; however, the problem states that the $20,000 LTCG over STCL is included in the $10,000 of net income. The only explanation that I can think of is that the author netted the face of the 1120S with Schedule K. I might be missing something in there though. Would be interested in seeing the solution as well.

    #1373042
    Namstut
    Participant

    @taxgeek83, I think we are on the same page, I understand that $10K net income includes $20K LTCG over STCL, which means that there was a $10K loss before the gains were added.

    I am thinking that the only way the answer could be $5K of LTCG is if your $10K loss was a STCL, otherwise the amount that the shareholder would report on his or her individual income tax return for the year as long-term capital gain passed through from Wheeler would be reported as other income from S Corp. I might be totally wrong here but that is the only explanation that makes sense to me. 🙂

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

    #1373081
    aaronmo
    Participant

    Folks are over complicating this…

    All of the taxable gain is composed of capital gains. The capital gains are distributed to the indi. schedule by ownership %…the actual $ distribution is irrelevant in an -s-corp as far as taxes.

    There's 10 grand in capital gains for the s-corp. Each partner gets 1/2. $5000.

    #1373097
    vorobjeva44
    Participant

    For S corp each shareholder must report percentage of his ownership multiplied by TAXABLE INCOME, i remembered it from some similar question in NINJA MCQ.

    #1373178
    taxgeek83
    Participant

    @aaronmo – You're right! Definitely over complicated that one. The wording in the second sentence threw me off I think. It seemed like once all gains were netted together, $20,000 was leftover. Separately stated, that would be $10,000 in LTCG to each shareholder. I was too focused on trying to figure out how they got to $10,000 in taxable income. 🙂

    #1373186
    aaronmo
    Participant

    @taxgeek – I might be only speaking for me here, and it might not apply to you…but I've found that the more I study…the more I plug away…the more prone I am to over complicate things and to sometimes try and draw from other material and apply it to what is in front of me. The good news is that I've found that the exams are USUALLY less conducive towards that kind of over analysis than the MCQ.

    What I'm saying is…when I'm over analyzing and making things MORE confusing, it usually seems to mean I understand the material. It's a good sign!

    #1373231
    taxgeek83
    Participant

    @aaronmo – Yep! In the simplest form, 1+1=2, but then you throw algebra, calculus, dif eq, etc. in the middle of the equation and it complicates the problem far more than it needs to be. A case of too much knowledge not necessarily being a good thing. 😉

    #1373589
    jessanqi
    Participant

    I still have one more stupid question, why All of the taxable gain is composed of capital gains??

    #1373600
    Namstut
    Participant

    @jessanqi, I think we all agreed that this problem implies that $10K of the taxable income included capital losses only. Is there an explanation to the solution to this problem?

    Or I guess we will never know…

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

    #1373613
    jessanqi
    Participant

    The correct answer is C. Where a Subchapter S corporation's net long term capital gains exceed net short term capital losses, dividends actually or constructively received may qualify as long-term capital gains in the hands of its stockholders, but only to the extent of current earnings and profits. Thus, although there are $20,000 of excess net long-term capital gains, the shareholders may claim only $10,000 (Wheeler's taxable income), or $5,000 for each shareholder.

    Sorry I don't know why sometimes I posted something then it's disappear…

    #1373718
    jessanqi
    Participant

    Thank you guys for the help!!! you are the best!

Viewing 13 replies - 1 through 13 (of 13 total)
  • The topic ‘S corp’ is closed to new replies.