- This topic has 3 replies, 3 voices, and was last updated 9 years ago by
.
-
Topic
-
Graphite Corp. has been a calendar-year S corporation since its inception on January 2, 2004. On January 1, 2015, 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, 2015, 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, 2015. What total amount of income from Graphite is includible in Smith’s 2015 adjusted gross income?
A. $96,000
B. $93,000
C. $43,000
D. $40,000
Answer is D, I don’t understand the explanation. I picked C, half of tax exempted income and ordinary business income. in S corp, I don’t remember they exclude tax exempt income.Is tax exempted income only count for basis and it doesn’t count as income when we do 1040 calculation? It kind of make sense, it flows through
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).
Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake
- The topic ‘S corp question for REG’ is closed to new replies.
