Corporation S is an S Corporation which elects S status effective January a of t
ID: 2408455 • Letter: C
Question
Corporation S is an S Corporation which elects S status effective January a of the tax year specified for the exam. Sole shareholder J has a basis of $400,000 in his stock. At the same time, S has $200,000 in accumulated earnings and profits. For the same tax year, S has the following items of income and expense:
Gross Business Income $250,000
Dividend income $150,000
Business expenses $100,000
Expenses related to Dividends $50,000
a. J has non-separately stated income of $150,000 and dividend income of $100,000
b. J has non-separately stated income of $150,000 and dividend income of $83,333.
c. Neither of the above.
please explain why you choose this answer. Thank you.
Explanation / Answer
Option a.
Business expenses are deductible from gross business income, assuming they are not already deducted so Net Income from business is as follows
Gross Business Income - Business Expenses = 250000-100000 = 150000
No expenses are allowed to be deducted against the dividend income but not the business income. and hence
Net Dividend Income = Gross Dividend Income - Expenses related to divided = 150000-50000 = 100000
so the correct option is (a)